Putnam
Diversified
Income
Trust
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Periods of fear and uncertainty have often proved the best time to
invest. . . . Since World War II, no bear market has lasted longer than
two years, and nothing now suggests anything that would break the mold and
subject us to a catastrophe the likes of which we haven't seen in this
country since the 1930s."
-- SmartMoney, November 1998
* "We believe Putnam Diversified Income Trust's strategy of investing in
three different fixed-income sectors is a sound one for all market
environments. Over the past decade, it certainly has stood the test of
time, providing investors with an average annual return in excess of 8%
for class A shares at NAV since its inception.* While periods of
volatility are always disconcerting, we are confident that the fund's
global flexibility and Putnam's intensive credit research will enable the
management team to meet any challenge head on."
-- Jennifer E. Leichter, fund manager
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
39 Financial statements
* See page 9 of this report for complete performance information.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
By playing to the strengths and de-emphasizing the vulnerabilities of
Putnam Diversified Income Trust's multisector portfolio, the fund's
managers were able to moderate the effects of a volatile market climate
during the period. Thus fiscal 1998 results, while not positive, were
showing neither the sharp declines nor the solid gains of many
single-sector portfolios in the prevailing environment.
Shortly after the close of the fiscal year, David L. Waldman and Jeffrey
A. Kaufman were appointed to your fund's management team. David joined
Putnam in 1997 following positions with Lazard Freres Asset Management and
Goldman Sachs Asset Management. He has 10 years of investment experience.
Jeffrey joined Putnam in 1998. He was formerly with MFS Investment
Management and Salomon Brothers and has 8 years of investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 18, 1998
Report from the Fund Managers
Jennifer E. Leichter, lead manager
Michael Martino
D. William Kohli
Throughout the 12 months ended September 30, 1998, resurgent financial and
political instability in many of the world's developing countries had a
dramatic effect on securities markets around the globe. As Asia's woes
intensified and Russia's currency crisis hit the boiling point, each of
Putnam Diversified Income Trust's three investment sectors -- U.S. taxable
investment grade, foreign, and high yield -- was affected in some manner.
As a result, while your fund has had seven years of solid performance, we
closed fiscal 1998 in slightly negative territory, posting a total return
of -1.67% for class A shares at net asset value and -6.31% at public
offering price. For complete performance information, please refer to the
summary that begins on page 9.
* SUCCESSFUL STRATEGY SOMEWHAT DAMPENED BY GLOBAL FLIGHT TO QUALITY
Our strategy throughout the year was to hold firm in our emphasis on the
so-called spread sectors -- those areas of the fixed-income market in
which the most attractive yield resides, such as high-yield bonds,
high-grade corporate issues, mortgage-backed securities, and a little bit
of emerging-markets debt. Our reasoning behind this approach involves a
time-tested belief that by overweighting the spread sectors in combination
with some exposure to U.S. government securities, your fund's portfolio
would offer the potential to outperform the broad fixed-income market in
the long term.
While this approach has greatly benefited your fund since its inception, a
dramatic about-face occurred in the final months of the period. The fund's
U.S. Treasury securities and mortgage-backed issues became the portfolio's
dominant performers as a result of a global flight to quality, while the
high-yield and investment-grade corporate positions suffered a severe
setback. Our focus on the core bond markets of Europe stood the fund in
good stead and helped provide some much-needed ballast in the wake of
capsizing emerging-markets debt.
* HIGH-YIELD BONDS BACKTRACK TO 1991 LEVELS
Seven years of price gains in the high-yield market were effectively
eradicated this past summer for reasons that had more to do with global
investor sentiment than with the business and economic fundamentals in the
United States. Signs of recession overseas, an unexpectedly weak U.S. jobs
report, lower-than-expected corporate earnings forecasts, Russia's
financial collapse, and broad-based selling of high-yield debt by highly
leveraged, distressed hedge funds to meet margin calls created a
sky-is-falling atmosphere. In response, investors came stampeding out of
just about any fixed-income security that involved credit risk. The spread
between high-yield bonds and Treasury securities (the difference in yield
between bonds with similar maturities) had widened by nearly 7% at
period's end.
As disturbing as the market rout has been, we are holding firm in the
fund's high-yield positioning for sound, fundamental reasons. The forces
that pushed Treasury bonds, stocks, and high-yield bonds higher for most
of the period, such as solid economic growth, healthy corporate
profitability, subdued inflation, and low interest rates, remain in place
and continue to provide ideal conditions for high-yield investing. Indeed,
the high-yield bond sector was the top-performing global fixed-income
sector through June. Merger and acquisition activity is still brisk,
defaults remain low, and the fiscal health of corporate America and the
U.S. government is far better than it has been in years.
[GRAPHIC OMITTED: horizontal bar chart of TOP FIVE COUNTRY ALLOCATIONS
(INTERNATIONAL SECTOR)]
TOP FIVE COUNTRY ALLOCATIONS*
(INTERNATIONAL SECTOR)
United Kingdom 4.0%
France 3.8%
Germany 3.3%
Mexico 2.5%
Brazil 1.2%
Footnote reads:
*Based on net assets as of 9/30/98. Holdings will vary over time.
Bonds in the telecommunications, broadcasting, cable, and finance
industries remain our primary focus. The ongoing consolidation,
deregulation, and dynamic long-term growth potential of these industries
bode well for companies that are focused and driven. Nextel Communications
and WinStar remain favored holdings. While the securities discussed in
this report were viewed favorably at the end of the period, all holdings
are subject to review in accordance with the fund's investment strategy
and may vary in the future.
* U.S. TREASURY BONDS WERE WORLD'S DARLINGS
Since Asia's troubles first garnered the attention of investors worldwide
last October, the U.S. Treasury market has experienced a most impressive
and historic rally. Investors flocked to the high credit quality of U.S.
Treasury bonds throughout the fiscal period. This caused the yield on the
bellwether 30-year Treasury bond -- which moves in the opposite direction
from its price -- to ratchet steadily down to below 5%, a level not seen
in its 21-year history. The fund's exposure to the Treasury market
significantly helped performance, buoying its share price as other sectors
came under considerable pressure.
Higher-yielding mortgage-backed securities, however, were our main focus
in the U.S. government arena. While at times this prohibited the fund from
participating fully in the Treasury market rally, our focus on securities
with lower prepayment sensitivity, such as adjustable-rate, lower-coupon,
and 15-year maturity mortgage-backed securities, did benefit the fund.
Classified as intermediate-term maturities, the mortgage-backed issues we
selected provided the portfolio with what we believed to be the most
optimum duration exposure as the yield curve flattened through June and
then steepened near period's end. (Duration is a measure of sensitivity to
interest-rate changes.)
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR
HIGH-YIELD BONDS
Transamerican Energy, senior discount notes, Series B,
stepped-coupon (13s, 6/15/99), 2002
Global Crossing Holdings, 144A senior notes, 9 5/8s, 2008
Intermedia Communications, Inc., senior notes, Series B, 8.6s, 2008
FOREIGN BONDS
Germany (Federal Republic of) bonds, Series 98, 5 5/8s, 2028
France Treasury bill notes, 4 1/2s, 2003
United Kingdom Treasury bonds, 8s, 2000
U.S. INVESTMENT-GRADE SECURITIES
Federal National Mortgage Association pass-through certificates,
6 1/2s, with due dates from January 1, 2026 to August 1, 2028
Government National Mortgage Association pass-through certificates,
7s, with due dates from October 15, 2024 to August 15, 2028
U.S. Treasury Bonds, 6 1/8s, November 15, 2027
Footnote reads:
These holdings represent 25.4% of the fund's net assets as of 9/30/98.
Portfolio holdings will vary over time.
* FOREIGN FOCUS REMAINED CORE EUROPE
Developed-country bonds in Europe benefited from the global flight to
quality, posting solid returns in local currency terms over the period. We
focused on core European markets, such as Germany, France, and Great
Britain, at the expense of the higher-yielding peripheral markets, such as
Spain, Italy, and Sweden, which performed better until recently. As the
dollar weakened against most other major currencies this past summer, we
elected to avoid hedging currencies back to the dollar as best we could.
This strategy served to enhance the local foreign bond returns when
translated back to dollars. The forthcoming unification of monetary policy
and interest rates across 11 European countries -- and everything else
that Europe's Economic and Monetary Union (EMU) promises -- convinced us
to stay the course with our core European holdings.
The fund's exposure to emerging markets, although limited, hindered
returns as the crisis in Asia worsened and Russia's financial system
collapsed. We continue to avoid Japanese government bonds, anticipating
that the sad state of economic affairs in that country may well continue
for some time.
* MARKET OVERREACTION MAY HERALD MORE POSITIVE ENVIRONMENT
At the time of this writing, a good portion of the broad fixed-income
market is being priced as if the domestic and global economic situation is
in a dire state of affairs. We do not hold that belief. In our opinion,
fundamental forces at work all over the globe -- EMU, positive budget
developments in the United States and many other developed nations, low
inflation, stable-to-declining interest rates, and economic recovery
and/or continued growth -- are providing a positive backdrop for
fixed-income investing worldwide.
Having said that, however, we are not so naive as to suggest that the
current period of volatility is drawing to a close. Indeed, it may well
continue in the near term. But with volatility comes the opportunity to
add selectively -- at highly attractive prices -- to well-researched
positions that stand to benefit from a change in market sentiment. We look
forward to the challenges that may lie ahead, confident that your fund's
multisector strategy will again prove its potential over the long run.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 9/30/98, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit ratings
of high-yield corporate bonds reflect a greater possibility that adverse
changes in the economy or their issuers may affect their ability to pay
principal and interest on the bonds. Investments in non-U.S. securities
may be subject to certain risks such as currency fluctuations, economic
instability, and political developments. Although the U.S. government
guarantees the timely payment of principal and interest on some of the
underlying securities, the value of the fund shares is not guaranteed and
will fluctuate.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Diversified Income Trust is designed for investors seeking high current
income consistent with capital preservation through U.S. government,
high-yield, and international fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 9/30/98
Class A Class B Class M
(inception date) (10/3/88) (3/1/93) (12/1/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year -1.67% -6.31% -2.42% -7.01% -1.97% -5.19%
- ------------------------------------------------------------------------------
5 years 33.33 27.00 28.41 26.60 31.51 27.26
Annual average 5.92 4.90 5.13 4.83 5.63 4.94
- ------------------------------------------------------------------------------
Life of fund 133.53 122.46 115.89 115.89 126.50 119.11
Annual average 8.86 8.33 8.01 8.01 8.53 8.17
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/98
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield Price
Bond Index Bond Index Index Index
- ------------------------------------------------------------------------------
1 year 11.51% 10.35% -0.52% 1.36%
- ------------------------------------------------------------------------------
5 years 41.66 41.54 50.44 12.61
Annual average 7.22 7.20 8.51 2.40
- ------------------------------------------------------------------------------
Life of fund 143.42 139.64 176.09 36.39
Annual average 9.31 9.13 10.69 3.15
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
4.75% and 3.25%, respectively. Class B share returns for the 1-, 5-, and
10-year (where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares,
the higher operating expenses applicable to such shares. All returns
assume reinvestment of distributions at NAV. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
10/3/88
Lehman Brothers
Fund's class A Aggregate Bond Consumer Price
Date shares at POP Index Index
10/3/88 9,525 10,000 10,000
9/30/89 10,129 11,126 10,434
9/30/90 10,331 11,967 11,077
9/30/91 12,544 13,881 11,452
9/30/92 14,785 15,623 11,795
9/30/93 16,685 17,182 12,112
9/30/94 16,528 16,629 12,470
9/30/95 18,493 18,967 12,787
9/30/96 20,408 19,896 13,171
9/30/97 22,624 21,828 13,454
9/30/98 $22,246 $24,342 $13,639
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $21,589 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $22,650 ($21,911 at public offering price). See first page of
performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.6966 $0.6026 $0.6696
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Short term 0.1115 0.1115 0.1115
- ------------------------------------------------------------------------------
Long term 0.0489 0.0489 0.0489
- ------------------------------------------------------------------------------
Total $0.8570 $0.7630 $0.8300
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
9/30/97 $12.70 $13.33 $12.65 $12.67 $13.10
- ------------------------------------------------------------------------------
9/30/98 11.66 12.24 11.61 11.62 12.01
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 7.41% 7.06% 6.62% 7.13% 6.89%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 7.86 7.48 7.08 7.56 7.31
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Aggregate Bond Index* is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market
capitalization.
Salomon Brothers Non-U.S. World Government Bond Index* is a market
capitalization-weighted benchmark that tracks the performance of the
government bond markets tracked by the Salomon Brothers World Government
Bond Index, excluding the United States.
First Boston High Yield Index* is an unmanaged index of lower-rated,
higher-yielding U.S. corporate bonds. It includes over 180 issues with an
average maturity range of 7 to 10 years.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
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Report of independent accountants
For the fiscal year ended September 30, 1998
To the Trustees and Shareholders of
Putnam Diversified Income Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
Diversified Income Trust (the "fund") at September 30, 1998, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of investments owned at September 30, 1998, by
correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 17, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1998
CORPORATE BONDS AND NOTES (36.8%) (a)
PRINCIPAL AMOUNT VALUE
Advertising (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 7,275,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 7,638,750
9,690,000 Lamar Advertising Co. company guaranty 8 5/8s, 2007 9,956,475
10,590,000 Outdoor Communications Inc. sr. sub. notes 9 1/4s, 2007 10,801,800
--------------
28,397,025
Aerospace and Defense (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,900,000 Argo-Tech Corp. company guaranty 8 5/8s, 2007 1,795,500
5,910,000 Aviation Sales Co. company guaranty 8 1/8s, 2008 5,496,300
1,000,000 BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 1,060,000
5,820,000 BE Aerospace sr. sub. notes Ser. B, 8s, 2008 5,703,600
2,500,000 Derlan Industries Ltd. sr. notes 10s, 2007 (Canada) 2,250,000
2,160,000 K&F Industries, Inc. sr. sub. notes Ser. B, 9 1/4s, 2007 2,116,800
2,000,000 Sequa Corp. med. term notes 10s, 2001 2,134,920
3,670,000 United Defense Industries Inc. company guaranty
8 3/4s, 2007 3,679,175
--------------
24,236,295
Agriculture (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
11,378,518 Premium Standard Farms, Inc. sr. secd. notes
11s, 2003 (PIK) 12,004,336
4,790,000 Purina Mills, Inc. sr. sub. notes 9s, 2010 4,694,200
--------------
16,698,536
Airlines (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
3,400,000 Calair LLC 144A company guaranty 8 1/8s, 2008 3,111,000
4,020,000 Canadian Airlines Corp. sr. notes 12 1/4s, 2006 (Canada) 3,457,200
5,860,000 Canadian Airlines Corp. secd. notes 10s, 2005 (Canada) 5,274,000
7,420,000 Cathay International Ltd. 144A sr. notes 13s, 2008 4,006,800
3,630,000 Trans World Airlines, Inc. sr. notes 11 1/2s, 2004 3,421,275
7,970,000 Trans World Airlines, Inc. sr. notes 11 3/8s, 2006 7,013,600
--------------
26,283,875
Apparel (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,460,000 GFSI, Inc. sr. disc. notes Ser. B, stepped-coupon,
zero % (11 3/8s, 9/15/04), 2009 (STP) 2,337,000
1,135,000 GFSI, Inc. sr. sub. notes Ser. B, 9 5/8s, 2007 1,066,900
7,680,000 Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 7,219,200
4,955,000 Sassco Fashions Ltd. sr. notes 12 3/4s, 2004 5,252,300
2,215,000 William Carter Holdings Co. sr. sub. notes
Ser. A, 12s, 2008 2,281,450
--------------
18,156,850
Automotive Parts (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
6,640,000 Accuride Corp. sr. sub. notes Ser. B, 9 1/4s, 2008 6,374,400
2,030,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 2,156,875
1,837,000 Aftermarket Technology Corp. sr. sub. notes
Ser. D, 12s, 2004 1,951,813
3,975,000 Cambridge Industries, Inc. company guaranty
Ser. B, 10 1/4s, 2007 3,776,250
744,000 Hawk Corp. sr. notes 10 1/4s, 2003 766,320
5,850,000 Hayes Wheels International, Inc. 144A sr. sub. notes
9 1/8s, 2007 5,879,250
980,000 Hayes Wheels International, Inc. company guaranty
Ser. B, 9 1/8s, 2007 950,600
4,465,000 Lear Corp. sub. notes 9 1/2s, 2006 4,822,200
10,075,000 Navistar International Corp. sr. notes Ser. B, 8s, 2008 10,024,625
5,100,000 Oxford Automotive, Inc. company guaranty
10 1/8s, 2007 5,023,500
2,780,000 Safety Components International, Inc. sr. sub. notes
Ser. B, 10 1/8s, 2007 2,780,000
--------------
44,505,833
Banks (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
6,425,000 Chevy Chase Savings Bank Inc. sub. deb. 9 1/4s, 2005 6,232,250
2,425,000 Delta Financial Corp. sr. notes 9 1/2s, 2004 1,455,000
2,000,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 2027 2,267,680
5,150,000 First Nationwide Holdings sr. notes 12 1/2s, 2003 5,909,625
15,150,000 Fuji JGB Inv. LLC 144A FLIRB bonds
9.87s, 2049 (Japan) 6,719,480
3,330,000 Greenpoint Capital Trust I company guaranty
9.1s, 2027 3,592,904
1,000,000 Korea Developmental Bank bonds
7 3/8s, 2004 (Korea) 779,580
4,000,000 Korea Developmental Bank bonds
7 1/8s, 2001 (Korea) 3,492,040
2,145,000 North Fork Capital Trust I company guaranty
8.7s, 2026 2,413,318
1,355,000 Ocwen Capital Trust I company guaranty
10 7/8s, 2027 1,219,500
2,265,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 2,310,300
1,195,000 Onbank & Trust Co. company guaranty 9 1/4s, 2027 1,411,594
2,540,000 Peoples Heritage Capital Trust company guaranty
Ser. B, 9.06s, 2027 3,030,398
2,400,000 Provident Capital Trust company guaranty 8.6s, 2026 2,664,168
1,385,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 1,462,089
2,045,000 Sovereign Capital Trust company guaranty 9s, 2027 2,181,361
1,845,000 Webster Capital Trust I 144A bonds 9.36s, 2027 1,955,700
--------------
49,096,987
Basic Industrial Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,090,000 Koppers Industries, Inc. 144A sr. sub. notes 9 7/8s, 2007 1,013,700
4,700,000 Roller Bearing Co. company guaranty Ser. B, 9 5/8s, 2007 4,512,000
1,425,000 W. R. Carpenter North America, Inc.
company guaranty 10 5/8s, 2007 1,403,625
--------------
6,929,325
Broadcasting (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
5,875,000 Affinity Group Holdings sr. sub. notes 11 1/2s, 2003 5,919,063
5,505,000 Affinity Group Holdings sr. notes 11s, 2007 5,339,850
2,800,000 Allbritton Communications Co. sr. sub. deb.
Ser. B, 9 3/4s, 2007 2,870,000
6,940,000 Allbritton Communications Co. sr. sub. notes
Ser. B, 8 7/8s, 2008 6,870,600
50,635 Australis Media, Ltd. sr. disc. notes stepped-coupon
1 3/4s, (15 3/4s 5/15/00), 2003 (In default)
(Australia) (STP) (PIK) (NON) 380
856,252 Australis Media, Ltd. sr. sec. disc. notes zero %, 2000
(In default) (Australia) (NON) 642,960
9,495,000 Benedek Communications Corp. sr. disc. notes
stepped-coupon zero % (13 1/4s, 5/15/01), 2006 (STP) 7,026,300
6,860,000 Capstar Broadcasting sr. disc. notes stepped-coupon
zero % (12 3/4s, 2/1/02), 2009 (STP) 5,179,300
13,055,000 Capstar Broadcasting sr. sub. notes 9 1/4s, 2007 13,316,100
1,665,000 Central European Media Enterprises Ltd. sr. notes
9 3/8s, 2004 1,498,500
4,100,000 Chancellor Media Corp. sr. sub notes Ser. B, 8 1/8s, 2007 3,956,500
2,914,720 Citadel Broadcasting Inc. sr. sub. notes 10 1/4s, 2007 3,118,750
13,667,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) (STP) 11,070,270
7,420,000 Fox/Liberty Networks LLC sr. notes 8 7/8s, 2007 7,271,600
175,000 Granite Broadcasting Corp. sr. sub. notes 10 3/8s, 2005 182,000
9,940,000 Granite Broadcasting Corp. sr. sub. notes 8 7/8s, 2008 9,641,800
3,000,000 Jacor Communications, Inc. company guaranty
Ser. B, 8 3/4s, 2007 3,075,000
7,826,000 PHI Holdings, Inc. sr. notes 16s, 2001 5,932,891
3,635,000 Radio One Inc. company guaranty stepped-coupon
Ser. B, 7s, (12s, 5/15/00), 2004 (STP) 3,416,900
5,720,000 SFX Entertainment, Inc. 144A company guaranty
Ser. B, 9 1/8s, 2008 5,319,600
8,650,000 Sinclair Broadcast Group, Inc. company guaranty
9s, 2007 8,693,250
1,600,000 Sinclair Broadcast Group, Inc. sr. sub. notes 8 3/4s, 2007 1,584,000
4,300,000 Spanish Broadcasting sr. notes Ser. B, 11s, 2004 4,300,000
4,915,000 TCI Satellite Entertainment, Inc. sr. disc. notes
stepped-coupon zero % (12 1/4s, 2/15/02), 2007 (STP) 2,899,850
4,395,000 TCI Satellite Entertainment Inc. sr. sub. notes
10 7/8s, 2007 4,065,375
4,275,000 TV Azteca S.A. de C.V. sr. notes 10 1/2s, 2007 (Mexico) 2,907,000
970,000 TV Azteca S.A. de C.V. sr. notes Ser. A,
10 1/8s, 2004 (Mexico) 679,000
3,500,000 Viacom International, Inc. sub. deb. 8s, 2006 3,526,250
--------------
130,303,089
Building and Construction (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,040,000 American Architectural Products Corp.
company guaranty 11 3/4s, 2007 1,876,800
7,460,000 Atrium Companies Inc. 144A sub. notes 10 1/2s, 2006 7,385,400
2,000,000 Beazer Homes USA company guaranty 8 7/8s, 2008 1,860,000
2,080,000 Cia Latino Americana 144A company guaranty
11 5/8s, 2004 (Argentina) 1,497,600
6,300,000 GS Superhighway Holdings sr. notes 10 1/4s, 2007 2,646,000
1,870,000 GS Superhighway Holdings sr. notes 9 7/8s, 2004 785,400
2,030,000 Jackson Products, Inc. 144A company guaranty
9 1/2s, 2005 1,938,650
2,605,000 Presley Cos. sr. notes 12 1/2s, 2001 2,318,450
3,020,000 Republic Group Inc. 144A sr. sub. notes 9 1/2s, 2008 2,869,000
2,985,000 Terex Term Loan B 8.18s, 2005 2,955,150
--------------
26,132,450
Building Products (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
4,760,000 Albecca Inc. 144A sr. sub. notes 10 3/4s, 2008 4,522,000
4,260,000 Morris Material Handling, Inc. company guaranty
9 1/2s, 2008 3,067,200
1,895,000 Waxman Industries Inc. sr. notes stepped-coupon
Ser. B, zero % (12 3/4s, 6/1/99), 2004 (STP) 1,762,350
--------------
9,351,550
Buses (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
10,880,001 MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 (STP) 8,160,000
Business Services (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
1,850,000 ATC Group Services Inc. company guaranty 12s, 2008 1,073,000
11,830,000 Cex Holdings, Inc. 144A sr. sub. notes 9 5/8s, 2008 10,883,600
1,475,000 Iron Mountain, Inc. med. term notes
company guaranty 10 1/8s, 2006 1,548,750
5,750,000 Iron Mountain, Inc. company guaranty 8 3/4s, 2009 5,577,500
1,505,000 Outsourcing Solutions, Inc. sr. sub. notes
Ser. B, 11s, 2006 1,441,038
--------------
20,523,888
Cable Television (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
5,225,000 Acme Television sr. disc. notes stepped-coupon zero %
(10 7/8s, 9/30/00), 2004 (STP) 4,075,500
4,405,537 Adelphia Communications Corp. sr. notes
9 1/2s, 2004 (PIK) 4,559,731
2,590,000 Charter Communications International, Inc. disc. notes
Ser. B, stepped-coupon zero % (14s, 3/15/01), 2007 (STP) 2,227,400
2,950,000 Charter Communications International, Inc. sr. notes
Ser. B, 11 1/4s, 2006 3,215,500
5,270,000 Comcast Cellular Holdings sr. notes Ser. B, 9 1/2s, 2007 5,401,750
6,500,000 CSC Holdings, Inc. sr. sub. deb. 10 1/2s, 2016 7,345,000
14,340,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) (STP) 11,507,850
15,065,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007
(United Kingdom) (STP) 10,545,500
9,125,000 Fox Family Worldwide, Inc. sr. disc. notes stepped-coupon
zero % (10 1/4s, 11/1/02), 2007 (STP) 5,657,500
9,755,000 Fox Family Worldwide, Inc. sr. notes 9 1/4s, 2007 9,218,475
1,610,000 Globo Communicacoes 144A sr. notes
10 5/8s, 2008 (Brazil) 821,100
3,325,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 (Brazil) 1,729,000
15,200,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon
zero % (13 1/4s, 5/15/01), 2008 (Mexico) (STP) 11,248,000
8,225,000 Grupo Televisa S.A. 144A sr. notes 11 7/8s, 2006 (Mexico) 7,484,750
4,250,000 Lenfest Communications, Inc. sr. sub. notes 8 1/4s, 2008 4,292,500
6,490,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon
zero % (14 1/4s, 6/15/00), 2005 (STP) 6,035,700
3,640,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 (STP) 3,567,200
4,170,000 Supercanal Holdings S.A. 144A sr. notes
11 1/2s, 2005 (Argentina) 1,751,400
5,950,000 United International Holdings sr. disc. notes Ser. B,
stepped-coupon zero % (10 3/4s, 2/15/03), 2008 (STP) 2,796,500
--------------
103,480,356
Cellular Communications (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
890,000 Allegiance Telecom, Inc. sr. notes 12 7/8s, 2008 818,800
14,475,000 Allegiance Telecom, Inc. sr. disc. notes Ser. B,
stepped-coupon zero % (11 3/4s, 2/15/03), 2008 (STP) 6,224,250
1,220,000 Celcaribe S.A. sr. notes stepped-coupon zero %
(13 1/2s, 12/4/98), 2004 (Columbia) (STP) 1,232,200
19,177,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
zero % (14s, 10/1/02), 2007 (STP) 9,204,960
8,030,000 Cencall Communications Corp. sr. disc. notes
stepped-coupon zero % (10 1/8s, 1/15/99), 2004 (STP) 7,909,550
6,500,000 Dial Call Communications, Inc. sr. disc. notes Ser. B,
stepped-coupon zero % (10 1/4s, 12/15/98), 2005 (STP) 6,435,000
10,455,000 Dobson Communications Corp. 11 3/4s, 2007 10,455,000
14,200,000 McCaw International Ltd sr. discount notes
stepped-coupon zero % (13s, 4/15/02), 2007 (STP) 7,100,000
22,850,000 Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006
(Luxembourg) (STP) 14,509,750
3,370,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (12 1/8s, 4/15/03), 2008 (STP) 1,516,500
25,460,000 NEXTEL Communications, Inc. sr. disc. notes
stepped-coupon zero % (9.95s, 2/15/03), 2008 (STP) 15,021,400
9,150,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9 3/4s, 10/31/02), 2007 (STP) 5,490,000
4,630,000 Price Communications Wireless Inc. 144A sr. notes
9 1/8s, 2006 4,537,400
3,795,000 Sygnet Wireless, Inc. sr. notes 11 1/2s, 2006 4,212,450
--------------
94,667,260
Chemicals (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
6,650,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 6,317,500
3,460,000 Geo Specialty Chemicals 144A sr. sub. notes
10 1/8s, 2008 3,321,600
4,690,000 Huntsman Corp. 144A sr. sub. notes
FRN 9.03s, 2007 4,455,500
7,000,000 ISP Holdings, Inc. sr. notes Ser. B, 9 3/4s, 2002 7,210,000
1,815,000 Pioneer Americas Acquisition 144A sr. notes
9 1/4s, 2007 1,470,150
6,035,000 Polytama International notes 11 1/4s, 2007
(Indonesia) 905,250
4,450,000 Sterling Chemicals Holdings sr. disc. notes stepped-
coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 1,780,000
4,790,000 Trikem S.A. 144A bonds 10 5/8s, 2007 (Brazil) 2,634,500
--------------
28,094,500
Coal (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
8,130,000 Lodestar Holding, Inc. 144A sr. notes 11 1/2s, 2005 6,666,600
Computer Services and Software (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,345,000 Concentric Network Corp. sr. notes 12 3/4s, 2007 1,244,125
9,490,000 IPC Information Systems sr. disc. notes stepped-coupon
zero % (10 7/8s, 11/1/01), 2008 (STP) 6,358,300
5,250,000 PSINet, Inc. sr. notes Ser. B, 10s, 2005 5,250,000
1,600,000 Unisys Corp. sr. notes 7 7/8s, 2008 1,596,000
--------------
14,448,425
Conglomerates (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,890,000 Axia, Inc. 144A sr. sub. notes 10 3/4s, 2008 5,683,850
Consumer Durable Goods (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
660,000 Hedstrom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12s, 6/1/02), 2009 (STP) 396,000
1,960,000 Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 1,489,600
1,750,000 Sealy Mattress Co. sr. sub. notes Ser. B, 9 7/8s, 2007 1,715,000
--------------
3,600,600
Consumer Non Durables (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,050,000 Amscan Holdings, Inc. sr. sub. notes 9 7/8s, 2007 924,000
3,810,898 Imperial Holly Term Loan A 7.656s, 2003 3,734,680
2,560,000 Packaged Ice, Inc. company guaranty Ser. B, 9 3/4s, 2005 2,406,400
1,040,000 United Stationer Supply, Inc. 144A sr. sub. notes
8 3/8s, 2008 1,037,400
915,000 Viasystems Inc. sr. sub notes 9 3/4s, 2007 841,800
6,880,000 Viasystems, Inc. 144A sr. notes 9 3/4s, 2007 5,848,000
--------------
14,792,280
Consumer Services (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
7,506,000 Coinmach Corp. sr. notes Ser. D 11 3/4s, 2005 7,881,300
Containers (--%)
- --------------------------------------------------------------------------------------------------------------------------
1,400,000 Radnor Holdings Inc. sr. notes 10s, 2003 1,372,000
Cosmetics (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,430,000 Chattem, Inc. company guaranty Ser. B, 8 7/8s, 2008 2,308,500
1,225,000 French Fragrances, Inc. sr. notes Ser. B, 10 3/8s, 2007 1,261,750
1,800,000 French Fragrances, Inc. company guaranty
Ser. D, 10 3/8s, 2007 1,800,000
6,385,000 Revlon Consumer Products sr. sub. notes 8 5/8s, 2008 6,273,263
--------------
11,643,513
Electric Utilities (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
7,625,000 AES China Generating Co. sr. notes 10 1/8s,
2006 (China) 5,718,750
7,520,000 Cleveland Electric Illuminating Co. bonds 6.86s, 2008 7,595,200
2,800,000 El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 3,200,932
7,460,000 Long Island Lighting Co. deb. 9s, 2022 8,620,925
3,985,000 Midland Funding Corp. deb. Ser. B, 13 1/4s, 2006 5,160,734
16,920,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 20,988,752
7,550,000 Niagara Mohawk Power Corp. sr. notes Ser. G,
7 3/4s, 2008 8,052,755
2,860,000 Niagara Mohawk Power Corp. sr. notes Ser. F,
7 5/8s, 2005 2,978,290
2,498,933 Northeast Utilities System notes Ser. A, 8.58s, 2006 2,711,667
2,307,692 Northeast Utilities System notes Ser. B, 8.38s, 2005 2,407,615
--------------
67,435,620
Electronic Components (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
2,210,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (Canada) 2,342,600
1,806,704 Cirent Semiconductor sr. sub. notes 10.22s, 2002 1,788,637
1,916,986 Cirent Semiconductor 144A sr. sub. notes
10.14s, 2004 1,897,816
1,200,000 Details, Inc. sr. discount notes stepped-coupon
Ser. B, zero % (12 1/2s, 11/15/02), 2007 (STP) 660,000
1,500,000 Details, Inc. sr. sub. notes Ser. B, 10s, 2005 1,440,000
2,760,000 DII Group, Inc. (The) sr. sub. notes 8 1/2s, 2007 2,511,600
5,440,000 Flag Ltd. 144A sr. notes 8 1/4s, 2008 (Bermuda) 5,181,600
8,655,000 Flextronics International Ltd. sr. sub. notes Ser. B,
8 3/4s, 2007 8,222,250
1,585,000 HCC Industries, Inc. company guaranty 10 3/4s, 2007 1,585,000
700,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 728,000
7,295,000 Motors and Gears, Inc. sr. notes Ser. D, 10 3/4s, 2006 7,076,150
1,040,000 Samsung Electronics 144A company guaranty
9 3/4s, 2003 764,400
4,920,000 Wavetek Corp. company guaranty 10 1/8s, 2007 4,526,400
7,465,000 Zilog, Inc. company guaranty Ser. B, 9 1/2s, 2005 4,628,300
--------------
43,352,753
Energy-Related (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
150,000 Calpine Corp. sr. notes 10 1/2s, 2006 160,500
1,900,000 Calpine Corp. sr. notes 9 1/4s, 2004 1,919,000
3,540,000 Gothic Production Corp. company guaranty
Ser. B, 11 1/8s, 2005 2,584,200
9,535,000 Panda Global Energy Co. company guaranty
12 1/2s, 2004 (Cayman Islands) 5,721,000
2,710,000 RAM Energy Inc. sr. notes 11 1/2s, 2008 2,493,200
5,260,000 York Power Funding 144A notes 12s, 2007
(Cayman Islands) 5,102,200
--------------
17,980,100
Entertainment (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,850,000 Six Flags Corp. sr. sub. notes 12 1/4s, 2005 3,106,500
5,000,000 United Artist Term Loan C 8.688s, 2007 4,956,250
6,790,000 United Artists Theatre 144A sr. sub. notes 9 3/4s, 2008 6,280,750
--------------
14,343,500
Environmental Control (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
7,270,000 Allied Waste Industries, Inc. sr. disc. notes stepped-coupon
zero % (11.3s, 6/1/02), 2007 (STP) 5,379,800
3,645,000 Allied Waste Industries, Inc. company guaranty
10 1/4s, 2006 3,973,050
--------------
9,352,850
Financial Services (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
6,120,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 5,508,000
1,500,000 Advanta Corp. med. term notes Ser. B, 7s, 2001 1,427,100
1,425,000 Colonial Capital I 144A company guaranty 8.92s, 2027 1,470,867
2,100,000 Dine S.A. de C.V. 144A company guaranty
8 3/4s, 2007 (Mexico) 1,365,000
22,355,000 DTI Holdings Inc. sr. disc. notes, stepped-coupon
Ser. B, zero % (12 1/2s, 3/01/03), 2008 (STP) 8,494,900
5,405,000 Imperial Credit Capital Trust I 144A company guaranty
10 1/4s, 2002 4,324,000
4,455,000 Imperial Credit Industries, Inc. sr. notes 9 7/8s, 2007 3,430,350
2,890,000 Investors Capital Trust I company guaranty
Ser. B, 9.77s, 2027 3,258,475
2,800,000 Local Financial Corp. 144A sr. notes 11s, 2004 2,828,000
2,665,000 Nationwide Credit Inc. 144A sr. notes 10 1/4s, 2008 2,531,750
4,055,000 Resource America Inc. 144A sr. notes 12s, 2004 3,385,925
920,000 Sampoerna International Finance Co. 144A
company guaranty 8 3/8s, 2006 (Indonesia) 377,200
2,750,000 SRI Receivables Purchase 144A notes 12 1/2s, 2000 2,805,000
2,900,000 Superior Financial 144A sr. notes 8.65s, 2003 2,922,765
--------------
44,129,332
Food and Beverages (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
6,030,000 Aurora Foods, Inc. 144A ser. sub. notes Ser. D,
9 7/8s, 2007 6,452,100
1,885,000 Canandaigua Wine Co. sr. sub. notes Ser. C,
8 3/4s, 2003 1,922,700
3,855,000 Fleming Companies, Inc. company guaranty Ser. B,
10 1/2s, 2004 3,739,350
6,900,000 RAB Enterprises, Inc. 144A sr. notes 10 1/2s, 2005 6,417,000
7,190,000 Windy Hill Pet Food Co. sr. sub. notes 9 3/4s, 2007 7,261,900
--------------
25,793,050
Food Chains (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
7,510,000 Ameriserve Food Co. company guaranty
10 1/8s, 2007 6,608,800
6,830,000 Ameriserve Food Co. company guaranty 8 7/8s, 2006 6,010,400
2,640,000 Nebco Evans Holding Co. sr. disc. notes stepped-coupon
zero % (12 3/8s, 7/15/02), 2007 (STP) 1,188,000
--------------
13,807,200
Gaming (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
7,020,000 Argosy Gaming Co. company guaranty 13 1/4s, 2004 7,458,750
4,785,000 Autotote Corp. company guaranty Ser. B,
10 7/8s, 2004 4,641,450
6,785,000 Coast Hotels & Casinos, Inc. company guaranty
Ser. B, 13s, 2002 7,599,200
8,804,200 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 9,376,473
6,040,000 Fitzgeralds Gaming Corp. company guaranty Ser. B,
12 1/4s, 2004 4,107,200
7,650,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 7,917,750
2,085,000 Isle of Capri Black Hawk LLC 1st mortgage
Ser. B, 13s, 2004 2,085,000
9,593,000 Louisiana Casino Cruises Corp. 1st mtge.
11 1/2s, 1998 9,593,000
8,495,000 Mohegan Tribal Gaming Auth. sr. notes Ser. B,
13 1/2s, 2002 10,533,800
2,550,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 1,657,500
6,000,000 Sun International Hotels Ltd. company guaranty
9s, 2007 6,120,000
2,500,000 Trump A.C. 1st mtge. 11 1/4s, 2006 2,087,500
9,130,000 Trump Castle Funding 144A sub. notes 10 1/4s, 2003 9,221,300
3,840,000 Trump Holdings & Funding Corp. sr. notes
15 1/2s, 2005 3,840,000
--------------
86,238,923
Health Care (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
4,940,000 Extendicare Health Services, Inc. company guaranty
9.35s, 2007 4,693,000
1,510,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 1,457,150
5,980,000 Global Health Sciences company guaranty 11s, 2008 5,202,600
5,460,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/2s, 2007 5,296,200
5,880,000 Integrated Health Services, Inc. sr. sub. notes Ser. A,
9 1/4s, 2008 5,644,800
6,660,000 Magellan Health Services, Inc. 144A sr. sub. notes 9s, 2008 5,661,000
2,410,000 Mariner Post-Acute Network, Inc. sr. sub. notes Ser. B,
stepped-coupon zero % (10 1/2s, 11/1/02), 2007 (STP) 1,313,450
15,360,000 Mariner Post-Acute Network, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 14,131,200
9,350,000 MedPartners, Inc. sr. notes 7 3/8s, 2006 7,724,409
220,000 MedPartners, Inc. sr. sub.notes 6 7/8s, 2000 186,058
12,585,000 Multicare Cos., Inc. sr. sub. notes 9s, 2007 11,829,900
9,195,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 8,459,400
2,420,000 Paragon Corp. Holdings, Inc. company guaranty
Ser. B, 9 5/8s, 2008 1,815,000
3,600,000 PharMerica, Inc. company guaranty 8 3/8s, 2008 3,240,000
7,645,000 Sun Healthcare Group, Inc. sr. sub. notes
Ser. B, 9 1/2s, 2007 6,880,500
2,860,000 Sun Healthcare Group, Inc. 144A sr. sub. notes
9 3/8s, 2008 2,545,400
--------------
86,080,067
Lodging (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Coast Hotels & Casinos, Inc. company guaranty
Ser. B, 10 7/8s, 2001 2,060,000
3,640,000 Epic Resorts LLP 144A sr. notes 13s, 2005 3,458,000
11,190,000 HMH Properties, Inc. company guaranty Ser. B,
7 7/8s, 2008 11,050,125
6,300,000 Host Marriott Travel Plaza sr. notes Ser. B, 9 1/2s, 2005 6,520,500
3,500,000 John Q Hammons Hotels, Inc. 1st mtge. 9 3/4s, 2005 3,465,000
3,855,000 Prime Hospitality Corp. sub. notes 9 3/4s, 2007 3,546,600
4,390,000 Raintree Resorts International, Inc. sr. notes
Ser. B, 13s, 2004 3,292,500
--------------
33,392,725
Machinery (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
3,750,000 Newcor, Inc. company guaranty Ser. B, 9 7/8s, 2008 3,300,000
Medical Supplies and Devices (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
4,395,000 ALARIS Medical Systems, Inc. company guaranty
9 3/4s, 2006 4,087,350
2,930,000 Conmed Corp. company guaranty 9s, 2008 2,761,525
4,660,000 Dade International, Inc. sr. sub. notes Ser. B,
11 1/8s, 2006 5,009,500
6,100,000 Fresenius Medical Capital Trust II company guaranty
7 7/8s, 2008 (Germany) 5,642,500
2,105,000 Imagyn Medical Technologies, Inc. company guaranty
12 1/2s, 2004 578,875
2,155,000 Kinetic Concepts, Inc. company guaranty Ser. B,
9 5/8s, 2007 2,133,450
3,900,000 Leiner Health Products sr. sub. notes 9 5/8s, 2007 3,982,875
6,160,000 Mediq, Inc. 144A sr. sub. notes 11s, 2008 5,790,400
4,915,000 Wright Medical Technology, Inc. 144A notes Ser. C,
11 3/4s, 2000 4,398,925
--------------
34,385,400
Metals and Mining (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,140,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 775,200
3,535,000 Anker Coal Group, Inc. sr. notes Ser. B, 9 3/4s, 2007 2,191,700
2,705,000 Continental Global Group sr. notes Ser. B, 11s, 2007 2,353,350
--------------
5,320,250
Motion Picture Distribution (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
4,810,000 AMC Entertainment, Inc. sr. sub. notes 9 1/2s, 2009 4,497,350
6,115,000 Cinemark USA, Inc. sr. sub. notes Ser. B,
9 5/8s, 2008 (Mexico) (PIK) 6,237,300
800,000 Cinemark USA, Inc. sr. sub. notes Ser. D,
9 5/8s, 2008 (Mexico) (PIK) 816,000
4,410,000 Silver Cinemas Intl.144A sr. sub. notes 10 1/2s, 2005 4,200,525
--------------
15,751,175
Office Equipment (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,650,000 U.S. Office Products Co. 144A sr. sub notes
9 3/4s, 2008 4,717,750
Oil and Gas (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
10,930,000 Abraxas Petroleum Corp. 144A
company guaranty Ser. D, 11 1/2s, 2004 8,525,400
730,000 American Eco Corp. company guaranty Ser. B,
9 5/8s, 2008 547,500
3,500,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 2,975,000
625,000 Benton Oil & Gas Co. sr. notes 9 3/8s, 2007 490,625
8,110,000 Chesapeake Energy Corp. company guaranty
Ser. B, 9 5/8s, 2005 7,136,800
1,550,000 Coho Energy, Inc. sr. sub. notes 8 7/8s, 2007 1,410,500
3,950,000 Costilla Energy, Inc. sr. notes 10 1/4s, 2006 3,436,500
3,180,000 Dailey Petroleum Services Corp. company guaranty
9 1/2s, 2008 1,908,000
3,490,000 Eagle Geophysical, Inc. 144A sr. notes 10 3/4s, 2008 3,071,200
770,000 Gothic Energy Corp. sr. disc. notes Ser. B, stepped-coupon
zero % (14 1/8s, 5/1/03), 2006 (STP) 308,000
3,080,000 Michael Petroleum Corp. sr. notes Ser. B, 11 1/2s, 2005 2,741,200
4,035,000 Northern Offshore 144A company guaranty
10s, 2005 2,985,900
5,755,000 Panaco, Inc. company guaranty Ser. B, 10 5/8s, 2004 4,604,000
2,865,000 Seven Seas Petroleum sr. notes Ser. B, 12 1/2s, 2005 2,334,975
2,590,000 Southwest Royalties, Inc. company guaranty
10 1/2s, 2004 1,372,700
47,660,000 Transamerican Energy sr. disc. notes Ser. B, stepped-coupon
zero % (13s, 6/15/99), 2002 (STP) 22,876,800
19,465,000 Transamerican Energy sr. notes Ser. B, 11 1/2s, 2002 10,705,750
5,152,000 TransTexas Gas Corp. sr. sub. notes Ser. D,
13 3/4s, 2001 4,894,400
--------------
82,325,250
Packaging and Containers (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,830,000 AEP Industries, Inc. sr. notes 9 7/8s, 2007 1,756,800
3,290,000 Huntsman Packaging Corp. company guaranty
9 1/8s, 2007 3,125,500
--------------
4,882,300
Paging (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,955,000 Mobile Telecommunications Tech. sr. notes
13 1/2s, 2002 2,189,600
900,000 Paging Network Do Brasil sr. notes 13 1/2s, 2005 (Brazil) 333,000
2,180,000 Pagemart Nationwide, Inc. sr. disc. notes
stepped-coupon zero % (15s, 2/1/00), 2005 (STP) 1,929,300
--------------
4,451,900
Paper and Forest Products (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
4,864,990 Alabama River Newsprint Co. bank loan notes
FRN 7.562s, 2002 4,329,841
3,750,000 APP Finance II Mauritius Ltd. bonds sr. disc. notes
stepped-coupon zero %, (16s, 2/15/04), 2049
(Indonesia) (STP) 1,875,000
550,000 APP International Finance Co. notes 11 3/4s, 2005
(Netherlands) 324,500
815,000 Florida Coast Paper LLC 1st mtge. Ser. B,
12 3/4s, 2003 770,175
5,280,000 Impac Group Inc. 144A sr. sub. notes 10 1/8s, 2008 4,989,600
14,410,000 Indah Kiat Financial Mauritius Ltd. company guaranty
10s, 2007 (Indonesia) 6,268,350
12,305,000 Pindo Deli Finance Mauritius Ltd. company guaranty
10 3/4s, 2007 (Indonesia) 4,922,000
10,660,000 PT Pabrik Kertas Tjiwi Kimia company guaranty
10s, 2004 (Indonesia) 4,530,500
7,640,000 Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 4,813,200
2,640,000 Repap New Brunswick 144A sr. notes 9s, 2004 (Canada) 2,409,000
13,760,000 Riverwood International Corp. company guaranty
10 7/8s, 2008 11,420,800
6,640,000 Riverwood International Corp. company guaranty
10 1/4s, 2006 6,042,400
--------------
52,695,366
Pharmaceuticals (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
4,020,000 ICN Pharmaceuticals, Inc. 144A sr. notes 9 1/4s, 2005 3,979,800
Photography (--%)
- --------------------------------------------------------------------------------------------------------------------------
1,550,000 Panavision Inc. 144A sr. disc. notes stepped-coupon
zero % (9 5/8s, 2/1/02), 2006 (STP) 883,500
Publishing (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
4,150,000 American Media Operation, Inc. sr. sub. notes
11 5/8s, 2004 4,295,250
5,270,000 Garden State Newspapers, Inc. sr. sub. notes Ser. B,
8 3/4s, 2009 5,111,900
50,000 Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 51,375
4,520,000 Perry-Judd company guaranty 10 5/8s, 2007 4,339,200
3,595,000 Tri State Media, Inc. 144A sr. sub. notes 11s, 2008 3,496,138
2,925,000 Von Hoffman Press Inc. 144A sr. sub. notes 10 3/8s, 2007 2,968,875
--------------
20,262,738
Railroads (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
7,900,000 TFM S.A. de C.V. company guaranty stepped-coupon
zero %, (11 3/4s, 6/15/02), 2009 (Mexico) (STP) 4,187,000
4,420,000 TFM S.A. de C.V. company guaranty
10 1/4s, 2007 (Mexico) 4,110,600
--------------
8,297,600
Real Estate (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
960,000 Bluegreen Corp. company guaranty Ser. B,
10 1/2s, 2008 873,600
4,296,875 Patriot Amer Hosp Term Loan B 8 1/8s, 2003 (R) 4,210,938
--------------
5,084,538
Recreation (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
6,250,000 Premier Parks, Inc. sr. notes 9 1/4s, 2006 6,125,000
Restaurants (--%)
- --------------------------------------------------------------------------------------------------------------------------
2,200,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 2,332,000
Retail (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
9,190,000 Amazon.com Inc. sr. disc. notes stepped-coupon zero %
(10s, 05/01/03), 2008 (STP) 5,054,500
3,990,000 Fred Meyer, Inc. company guaranty 7.45s, 2008 4,189,899
2,080,000 Home Interiors & Gifts, Inc. 144A sr. sub. notes
10 1/8s, 2008 1,965,600
4,600,000 K mart Corp. pass-thru certificates Ser. 95K4,
9.35s, 2020 4,750,144
2,900,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 3,059,500
1,680,000 NBTY Inc. 144A sr. sub. notes 8 5/8s, 2007 1,625,400
7,890,000 North Atlantic Trading Co. co. guaranty Ser. B,
11s, 2004 7,337,700
840,000 Service Merchandise Co., Inc. sr. sub. deb. 9s, 2004 504,000
--------------
28,486,743
Satellite Services (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
5,955,000 American Mobile Satellite Corp. company guaranty
12 1/4s, 2008 3,424,125
2,018,000 Echostar Satellite Broadcast Corp. sr. disc. notes
stepped-coupon zero % (13 1/8s, 3/15/00), 2004 (STP) 1,775,840
3,200,000 Esat Holdings Ltd. 144A sr. notes stepped-coupon
zero % (12 1/2s, 2/01/02), 2007 (Ireland) (STP) 2,048,000
5,530,000 Golden Sky Systems 144A sr. sub. notes 12 3/8s, 2006 5,530,000
17,320,000 ICG Services, Inc. sr. disc. notes stepped-coupon
zero % (9 7/8s, 5/1/03), 2008 (STP) 7,967,200
5,695,000 Iridium LLC/Capital Corp. company guaranty
Ser. B, 14s, 2005 5,068,550
790,000 Iridium LLC/Capital Corp. company guaranty
Ser. A, 13s, 2005 695,200
5,000,000 Primestar Bank Loan 8 5/8s, 2004 4,850,000
2,915,000 Satelites Mexicanos S.A. de C.V. 144A sr. notes
10 1/8s, 2004 (Mexico) 1,982,200
4,992,000 Satelites Mexicanos S.A. de C.V. 144A company guaranty
FRB 9.06s, 2004 (Mexico) 4,887,260
--------------
38,228,375
Semiconductors (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
3,441,060 Fairchild Semiconductor Corp. 144A sr. sub. notes
11.74s, 2008 3,045,338
9,090,000 Fairchild Semiconductor Corp. sr. sub. notes
10 1/8s, 2007 8,181,000
--------------
11,226,338
Shipping (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,530,000 International Shipholding Corp. sr. notes 7 3/4s, 2007 1,392,300
4,760,000 Johnstown America Industries, Inc. company guaranty
Ser. C, 11 3/4s, 2005 4,902,800
2,430,000 MC Shipping, Inc. sr. notes Ser. B, 11 1/4s, 2008 1,968,300
1,000,000 Pegasus Shipping 144A 11 7/8s, 2008 960,000
--------------
9,223,400
Specialty Consumer Products (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
4,690,000 Decora Industries, Inc. 144A sr. sec. notes 11s, 2005 4,127,200
3,460,000 Eye Care Centers of America 144A sr. sub. notes
9 1/8s, 2008 2,906,400
--------------
7,033,600
Steel (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,500,000 Ameristeel Corp. company guaranty Ser. B,
8 7/8s, 2008 5,060,000
8,150,000 Ispat Mexicana, S.A. 144A bonds 10 3/8s, 2001 (Mexico) 6,825,625
3,350,000 WHX Corp. sr. notes 10 1/2s, 2005 3,082,000
--------------
14,967,625
Telecommunications (4.4%)
- --------------------------------------------------------------------------------------------------------------------------
590,000 21st Century Telecom Group, Inc. sr. disc. notes stepped-
coupon zero % (12 1/4s, 2/15/03), 2008 (STP) 300,900
4,590,000 Barak I.T.C. sr. disc. notes Ser. B, stepped-coupon zero %
(12 1/2s, 11/15/02), 2007 (Israel) (STP) 2,340,900
3,630,000 Caprock Communications Corp. 144A sr. notes
12s, 2008 3,267,000
1,360,000 Consorcio Ecuatoiano notes 14s, 2002 (Ecuador) 720,800
4,910,000 Covad Communications Group sr. disc. notes Ser. B,
zero % (13 1/2s, 3/15/03), 2008 (STP) 1,964,000
2,420,000 Esprit Telecom Group PLC sr. notes 11 1/2s, 2007
(United Kingdom) 2,250,600
9,465,000 Focal Communications Corp. sr. disc. notes, Ser. B, stepped-
coupon zero % (12 1/8s, 2/15/03), 2008 (STP) 4,732,500
23,120,000 Global Crossing Holdings 144A sr. notes 9 5/8s, 2008 22,542,000
5,395,000 GST Equipment Funding sr. notes 13 1/4s, 2007 5,664,750
5,931,000 GST Telecommunications, Inc. company guaranty stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 4,270,320
15,260,000 GST Telecommunications, Inc. 144A sr. disc. notes
stepped-coupon zero % (10 1/2s, 5/1/03), 2008 (STP) 7,401,100
2,790,000 Hermes Europe Railtel 144A sr. notes 11 1/2s, 2007
(Netherlands) 2,929,500
2,990,000 Hyperion Telecommunication Corp. sr. disc. notes Ser. B,
stepped-coupon zero % (13s, 4/15/01), 2003 (STP) 2,063,100
6,205,000 Hyperion Telecommunications, Corp. sr. notes Ser. B,
12 1/4s, 2004 6,111,925
9,350,000 ICG Communications, Inc. sr. disc. notes stepped-coupon
zero % (10s, 2/15/03), 2008 (STP) 4,441,250
6,410,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (STP) 4,999,800
6,030,000 Interact Systems, Inc. 144A stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 723,600
2,900,000 Intelcom Group (USA), Inc. company guaranty stepped-
coupon zero % (12 1/2s, 5/1/01), 2006 (STP) 2,066,250
770,000 Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 2/1/01), 2006 (STP) 504,350
10,275,000 Intermedia Communications, Inc. sr. disc. notes Ser. B,
stepped-coupon zero % (11 1/4s, 7/15/02), 2007 (STP) 7,295,250
21,820,000 Intermedia Communications, Inc. sr. notes
Ser. B, 8.6s, 2008 21,601,800
6,115,000 Intermedia Communications, Inc. sr. notes Ser. B,
8 1/2s, 2008 6,023,275
5,600,000 IXC Communications, Inc. sr. sub. notes 9s, 2008 5,544,000
13,080,000 KMC Telecom Holdings, Inc. sr. disc. notes stepped-coupon
zero % (12 1/2s, 2/15/03), 2008 (STP) 6,016,800
8,835,000 Knology Holdings, Inc. sr. disc. notes stepped-coupon
zero % (11 7/8s, 10/15/02), 2007 (STP) 4,505,850
3,020,000 L-3 Communications Corp. sr. sub. notes
Ser. B, 10 3/8s, 2007 3,299,350
1,870,000 L-3 Communications Corp. sr. sub. notes 8 1/2s, 2008 1,895,713
1,550,000 MetroNet Communications sr. notes 12s, 2007 1,650,750
2,150,000 MetroNet Communications Corp. sr. disc. notes
stepped-coupon zero % (10 3/4s, 11/1/02), 2007
(Canada) (STP) 1,300,750
8,850,000 MetroNet Communications Corp. sr. disc. notes zero %
(9.95s, 6/15/03), 2008 (Canada) (STP) 4,889,625
3,310,000 Microcell Telecommunications sr. disc. notes Ser. B,
stepped-coupon zero % (14s, 12/1/01), 2006
(Canada) (STP) 2,350,100
890,000 Netia Holdings B.V. 144A company guaranty stepped-
coupon zero % (11 1/4s, 11/1/01), 2007 (Poland) (STP) 364,900
1,570,000 Netia Holdings B.V. 144A company guaranty
10 1/4s, 2007 (Poland) 1,193,200
7,050,000 NorthEast Optic Network, Inc. sr. notes 12 3/4s, 2008 6,486,000
19,990,000 NTL Inc. 144A sr. notes stepped-coupon zero %
(9 3/4s, 4/01/03), 2008 (STP) 12,093,950
5,260,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (8.29s, 2/1/03), 2008 (STP) 3,892,400
5,245,000 Qwest Communications International, Inc. sr. disc. notes
stepped-coupon zero % (9.47s, 10/15/02), 2007 (STP) 4,038,650
9,710,000 Telecom Tech, Inc. 144A sr. sub. notes 9 3/4s, 2008 8,836,100
12,080,000 Teligent, Inc. sr. disc. notes Ser. B, stepped-coupon zero %
(11 1/2s, 3/1/03), 2008 (STP) 4,711,200
6,760,000 Teligent, Inc. sr. notes 11 1/2s, 2007 5,205,200
10,360,000 Time Warner Telecom Inc. sr. notes 9 3/4s, 2008 10,411,800
3,820,000 Versatel Teleco 144A sr. notes 13 1/4s, 2008 3,629,000
5,610,000 WinStar Communications. Inc. 144A sr. sub. notes
15s, 2007 5,497,800
9,700,000 WinStar Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 6,402,000
3,340,000 WinStar Communications. Inc. sr. sub. notes 11s, 2008 2,338,000
2,750,000 Winstar Equipment Corp. company guaranty
12 1/2s, 2004 2,502,500
--------------
223,270,608
Telephone Services (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
12,180,000 BTI Telecom Corp. sr. notes 10 1/2s, 2007 10,109,400
1,820,000 Call-Net Enterprises, Inc. sr. disc. notes stepped-coupon
zero % (8.94s, 8/15/03), 2008 (Canada) (STP) 1,055,600
15,295,000 Colt Telecommunications Group PLC sr. disc. notes
stepped-coupon zero %, (12s, 12/15/01), 2006
(United Kingdom) (STP) 11,930,100
9,055,000 Econophone, Inc. company guaranty 13 1/2s, 2007 9,824,675
8,230,000 Econophone, Inc. 144A notes stepped-coupon zero %
(11s, 2/15/03), 2008 (STP) 4,485,350
2,800,000 E. Spire Communications, Inc. sr. notes 13 3/4s, 2007 3,024,000
9,790,000 E. Spire Communications, Inc. sr. disc. notes stepped-coupon
zero % (12 3/4s, 4/1/01), 2006 (STP) 7,220,125
2,690,000 Facilicom International sr. notes Ser. B., 10 1/2s, 2008 2,340,300
2,830,000 IDT Corp. sr. notes 8 3/4s, 2006 2,490,400
6,500,000 Ionica Group PLC sr. disc. notes stepped-coupon
zero % (15s, 5/1/02), 2007 (United Kingdom) (STP) 390,000
3,343,000 ITC Deltacom, Inc. sr. notes 11s, 2007 3,577,010
3,120,000 MJD Communications Inc. 144A FRN 10s, 2008 3,120,000
3,915,000 MJD Communications, Inc. 144A sr. sub. notes
9 1/2s, 2008 3,915,000
6,810,000 Pathnet, Inc. 144A sr. notes 12 1/4s, 2008 5,175,600
10,430,000 Primus Telecommunications Group, Inc. sr. notes
Ser. B, 9 7/8s, 2008 9,074,100
9,570,000 RCN Corp. sr. disc. notes stepped-coupon zero %,
(11 1/8s, 10/15/02), 2007 (STP) 5,311,350
3,000,000 RCN Corp. sr. disc. notes stepped-coupon zero %
(11s, 7/1/03), 2008 (STP) 1,530,000
4,960,000 RCN Corp. sr. discount notes, stepped-coupon
Ser. B, zero % (9.8s, 2/15/03), 2008 (STP) 2,628,800
10,167,000 RSL Communications, Ltd. company guaranty
12 1/4s, 2006 10,522,845
4,190,000 RSL Communications Ltd. company guaranty, stepped-
coupon zero % (10 1/8s, 3/1/03), 2008 (STP) 2,136,900
2,805,000 RSL Communications Ltd. company guaranty
9 1/8s, 2008 2,412,300
2,760,000 Sprint Spectrum L.P. sr. disc. notes stepped-coupon
zero % (12 1/2s, 8/15/01), 2006 (STP) 2,401,752
2,120,000 Sprint Spectrum L.P. sr. notes 11s, 2006 2,385,000
1,800,000 Transtel S.A. 144A pass through certificates
12 1/2s, 2007 (Colombia) 720,000
2,980,000 US Xchange LLC 144A sr. notes 15s, 2008 2,965,100
12,660,000 Viatel, Inc. 144A sr. notes 11 1/4s, 2008 12,027,000
--------------
122,772,707
Textiles (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
8,130,000 Galey & Lord Inc. company guaranty 9 1/8s, 2008 6,991,800
1,725,000 Polymer Group, Inc. company guaranty
Ser. B, 9s, 2007 1,651,688
2,560,000 Polymer Group, Inc. company guaranty Ser. B,
8 3/4s, 2008 2,425,600
--------------
11,069,088
Transportation (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,820,000 Coach USA, Inc. 144A company guaranty 9 3/8s, 2007 1,820,000
1,775,000 Eletson Holdings, Inc. 1st pfd. mtge. notes
9 1/4s, 2003 (Greece) 1,748,375
5,320,000 Kitty Hawk, Inc. company guaranty 9.95s, 2004 5,320,000
--------------
8,888,375
Utilities (--%)
- --------------------------------------------------------------------------------------------------------------------------
1,025,000 CMS Energy Corp. pass through certificates 7s, 2005 1,031,119
Wireless Communications (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
3,815,000 Conecel Holdings 144A notes Ser. A, 14s, 2000 2,021,950
2,920,000 CTI Holdings S.A. 144A sr. notes stepped-coupon
zero %, (11 1/2s, 4/15/03), 2008 (STP) 1,109,600
4,730,000 Dobson Wireline Co. 144A sr. notes 12 1/4s, 2008 4,540,800
4,250,000 Orbital Imaging Corp. sr. notes Ser. B, 11 5/8s, 2005 3,995,000
2,085,000 Telesystem International Wireless Inc. sr. disc. notes Ser. C,
stepped-coupon zero %, (10 1/2s, 11/1/02), 2007 (STP) 969,525
--------------
12,636,875
--------------
Total Corporate Bonds and Notes
(cost $2,339,844,753) $1,886,641,927
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (24.6%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (18.8%)
- --------------------------------------------------------------------------------------------------------------------------
$17,462,075 Federal Home Loan Mortgage Corp. 7s, July 1, 2012 $ 17,945,774
Federal National Mortgage Association
11,040,000 7s, Dwarf, TBA, October 15, 2013 11,333,222
107,225,000 6s, Dwarf, TBA, October 15, 2013 108,330,490
Federal National Mortgage Association
Pass-through certificates
360,944,496 6 1/2s, with due dates from January 1, 2026 to
August 1, 2028 367,047,628
2,821,501 6 1/2s, Dwarf, with due dates from
September 1, 2010 to July 15, 2013 2,880,555
Government National Mortgage Association
Pass-through certificates
56,608,889 8s, with due dates from May 15, 2024 to
December 15, 2027 58,983,807
107,991,205 7 1/2s, with due dates from December 15, 2022 to
August 15, 2026 111,966,370
252,557,778 7s, with due dates from October 15, 2024 to
August 15, 2028 260,693,736
21,621,449 6 1/2s, with due dates from August 15, 2027 to
May 15, 2028 22,102,374
Government National Mortgage Association
Adjusted Rate Mortgages
48,930 7s, October 20, 2024 50,108
941,229 5 1/2s, April 20, 2028 943,287
--------------
962,277,351
U.S. Treasury Obligations (5.8%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
22,050,000 8 1/8s, August 15, 2019 (SEG) 30,204,972
12,430,000 6 3/8s, August 15, 2027 (SEG) 14,679,084
181,240,000 6 1/8s, November 15, 2027 (SEG) 208,935,284
21,863,000 5 1/2s, August 15, 2028 23,632,591
19,100,000 U.S. Treasury Notes 5 5/8s, May 15, 2008 20,890,625
--------------
298,342,556
--------------
Total U.S. Government and Agency Obligations
(cost $973,706,244) $1,260,619,907
FOREIGN GOVERNMENT BONDS AND NOTES (10.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
FRF 644,100,000 France Treasury bill notes 4 1/2s, 2003 $ 119,230,890
FRF 185,510,000 France (Government of) bonds 5 1/2s, 2029 36,163,279
FRF 198,350,000 France (Government of) bonds 5 1/2s, 2007 39,339,688
DEM 241,400,000 Germany (Federal Republic of) bonds
Ser. 98, 5 5/8s, 2028 162,644,877
USD 3,045,000 Korea (Republic of) unsub. 8 7/8s, 2008 2,557,800
NLG 38,620,000 Netherlands (Government of) bonds
7 1/2s, 2023 28,293,830
GBP 16,925,000 United Kingdom Treasury bonds 8s, 2021 41,585,146
GBP 64,345,000 United Kingdom Treasury bonds 8s, 2000 114,433,349
VEB 7,071,000 Venezuela (Government of) 13 5/8s, 2018 4,635,041
RUB 186,740,000 U.S. Dollar GKO Pass Through Structured Note
(Issued by Deutsche Bank. The principle at
redemption is linked to the bid price for the
Russian Treasury Bill at maturity, and the change in
the spot rate of the Russian Ruble from issue date.)
zero %, 1998 (In default) 1,751,621
--------------
Total Foreign Government Bonds and Notes
(cost $516,424,050) $ 550,635,521
COLLATERALIZED MORTGAGE OBLIGATIONS (10.8%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$11,635,000 Chase Mortgage Finance Corp. 6 3/4s, 2028 $ 12,005,411
917,888 Citicorp Mortgage Securities, Inc. Ser. 92-14M,
Class M, 7 1/2s, 2022 925,919
Commercial Mortgage Acceptance Corp.
15,750,000 Ser. 97-ML1, Class D, 7.11s, 2030 16,611,328
190,969,811 Ser. 97-ML1, Interest Only (IO), 0.962s, 2017 10,942,570
17,000,000 Ser. 98-C2, Class D, 6.757s, 2009 17,409,063
16,405,000 Countrywide Mortgage Backed Securities, Inc.
Ser. 93-C, Class A8, 6 1/2s, 2024 16,684,213
Criimi Mae Commercial Mortgage Trust
52,655,000 Ser. 98-C1, Class A2, 7s, 2011 53,872,647
21,110,000 Ser. 98-C1, Class B, 7s, 2011 20,710,889
216,771,774 Deutsche Mortgage & Asset Receiving Corp.
Ser. 98-C1, Class X, IO, 1.254s, 2031 14,225,648
26,031,643 Fannie Mae Ser. 93-251, Class Z, 6 1/2s, 2023 26,023,508
Fannie Mae Strip
45,797,939 Ser. 290, Class 2, 6 1/2s, 2024 7,399,230
12,503,607 Ser. 93-251, Class Z, 6 1/2s, 2023 11,243,478
7,098,690 Ser. 294, Class 1, zero %, 2028 6,332,253
First Union-Lehman Brothers Commercial Mortgage
16,405,000 Ser. 97-C2, Class D, 7.12s, 2012 16,757,451
20,480,000 Ser. 98-C2, Class D, 6.778s, 2013 20,277,600
23,350,000 Ser. 97-C2, Class A3, 6.65s, 2008 24,686,240
11,845,000 Ser. 97-C2, Class A2, 6.6s, 2007 12,463,624
108,955,291 Ser. 97-C2, IO, 1.092s, 2027 9,444,211
Freddie Mac
6,475,000 Ser. 2040, Class PE, 7 1/2s, 2028 7,376,126
4,625,000 Ser. 1439, Class I, 7 1/2s, 2022 5,144,951
6,345,872 Ser. 1717, Class L, 6 1/2s, 2024 6,700,844
Freddie Mac Strip
30,524,466 Ser. 195, IO 7 1/2s, 2028 3,572,316
66,702,970 Ser. 194, IO 6 1/2s, 2028 11,224,859
15,264,949 Ser. 199, IO 6 1/2s, 2028 2,568,805
30,354,015 Ser. 195, Principal Only (PO) zero %, 2028 27,717,010
GMAC Commercial Mortgage Securities Inc.
22,455,000 Ser. 98-C2, Class D, 6 1/2s, 2031 22,306,762
274,720,795 Ser. 98-C2, Class X, IO, 0.823s, 2031 12,630,718
7,443,000 Government National Mortgage Association
Ser. 97-8 Class PE, 7 1/2s, 2027 8,098,914
GS Mortgage Securities Corp. II
9,030,000 Ser. 98-GLII, Class D, 7.191s, 2031 9,171,094
16,490,000 Ser. 98-GLII, Class A2, 6.562s, 2031 17,304,194
Merrill Lynch Mortgage Investors, Inc.
7,476,000 7.782s, 2025 8,030,859
4,196,000 Ser. 98-C2, Class D, 14.045s, 2030 4,356,628
Morgan Stanley Capital I
5,190,000 Ser. 98-WF1, Class D, 7.12s, 2008 5,395,978
5,125,000 Ser. 98-XL1, Class E, 6.989s, 2030 5,326,797
Mortgage Capital Funding, Inc.
15,361,000 Ser. 98-MC1, Class A2, 6.663s, 2008 16,229,857
240,293,437 Ser. 98-MC1, Class X, IO, 0.722s, 2009 10,700,567
16,451,425 PNC Mortgage Securities Corp. Ser. 97-6, Class A2,
6.6s, 2027 16,615,940
6,219,383 Prudential Home Mortgage Securities Ser. 93-57,
Class A4, 5.9s, 2023 6,255,891
26,815,112 Residential Asset Securitization Trust Ser. 98, Class A8,
6 3/4s, 2028 27,666,701
13,320,000 Residential Funding Mortgage Sec. I Ser. 98-S13, Class A21,
6 3/4s, 2028 14,001,584
9,540,757 Rural Housing Trust Ser. 87-1, Class D, 6.33s, 2026 9,684,250
--------------
Total Collateralized Mortgage Obligations
(cost $552,683,225) $ 556,096,928
BRADY BONDS (4.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$92,045,000 Brazil (Government of) disc. bonds
FRB 6.625s, 2024 $ 54,306,550
620,000 Brazil (Republic of) FRB Ser. L, 6.938s, 2012 310,000
77,400,000 Bulgaria (Government of) Ser. A, FRB,
2 1/2s, 2012 35,700,750
FRF 34,170,000 Ivory Coast -- 144A FLIRB collateralized
FRB 2s, 2018 1,160,044
FRF 34,170,000 Ivory Coast -- PDI bonds FRB 1.9s, 2018 1,312,681
$25,410,000 Panama (Republic of) deb. FRB 4s, 2014 17,787,000
70,965,000 Peru (Government of) 144A Ser. PDI, 4s, 2017 35,659,913
103,040,000 United Mexican States sec. Ser. B, 6 1/4s, 2019 75,219,200
26,425,000 Venezuela (Government of) Ser. W-A,
6 3/4s, 2020 17,308,375
--------------
Total Brady Bonds (cost $280,834,883) $ 238,764,513
PREFERRED STOCKS (3.1%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
1,406 21st Century Telecom Group 144A $13.75
cum. pfd. (PIK) $ 1,124,800
87,500 AmeriKing, Inc. $3.25 pfd. (PIK) 2,187,500
61 Anvil Holdings Ser. B, $3.25 pfd. (PIK) 1,281
132,400 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 3,376,200
22,570 Capstar Broadcasting Inc. 144A $12.00 pfd. (PIK) 2,572,980
130,000 CGA Group Ltd. 144A Ser. A, $13.75 pfd. (PIK) 3,640,000
99,570 Chevy Chase Capital Corp. Ser. A, $5.188 pfd. 5,376,780
44,966 Citadel Broadcasting Inc. 144A $13.25 cum. pfd. (PIK) 5,081,158
2,835 Concentric Network Corp. Ser. B, 13.50% pfd. (PIK) 2,480,625
118,189 CSC Holdings, Inc. Ser. M, $11.125 cum. pfd. (PIK) 13,000,790
109,800 Diva Systems Corp. Ser. C, $6.00 pfd. 1,207,800
1,625 E. Spire Communications, Inc. 12.75% pfd. (PIK) 1,348,750
1,512 Echostar Communications, Inc. Ser. B, 12.125% pfd. (PIK) 1,459,080
172,935 Fitzgeralds Gaming Co. $3.75 pfd. (NON) 864,675
2,000 Fresenius Medical Care AG. 9.00%, pfd. (Germany) 1,990,000
10,907 Granite Broadcasting 144A $12.75 pfd. (PIK) 11,016,070
2,280 Hyperion Telecommunications Ser. B, $12.875 pfd. (PIK) 1,869,600
8,514 ICG Holdings, Inc. $14.25 pfd. (Canada) 8,939,700
9,157 ICG Holdings, Inc., 144A $14.00 pfd. (Canada) (PIK) 9,431,710
8,830 Intermedia Communication Ser. B, 13.50% pfd. (PIK) 9,889,600
6,211 IXC Communications, Inc. $12.50 pfd. (PIK) 6,614,715
56,799 Nebco Evans Holding Co. 144A 11.25% pfd. (PIK) 3,691,935
18,144 NEXTEL Communications, Inc. Ser. D, 13.00%
cum. pfd. (PIK) 19,232,640
5,732 NEXTEL Communications, Inc. Ser. E, $11.125 pfd. (PIK) 5,617,360
178,211 Nextlink Communications, Inc. 144A $7.00 cum. pfd. 9,266,972
862 Paxson Communications Corp. 13.25% cum. pfd. (PIK) 8,189,000
35,996 Public Service Co. of New Hampshire $2.65
1st mtge. pfd. 917,898
28,300 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 3,367,700
16,500 Sinclair Broadcast Group, Inc. $11.625 cum. pfd. 1,716,000
9,329 Spanish Broadcasting Systems 14.25% cum. pfd. (PIK) 9,142,420
6,279 Viatel, Inc. Ser. A, $10.00 cv. pfd. (PIK) 376,740
32,000 Von Hoffman Corp. 144A $13.50 pfd. 992,000
6,080 WinStar Communications, Inc. 144A $14.25 pfd. (PIK) 5,472,000
--------------
Total Preferred Stocks (cost $168,265,059) $ 161,456,479
ASSET-BACKED SECURITIES (1.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$12,195,000 Chemical Master Credit Card Trust Ser. 95-2,
Class A, 6.23s, 2003 $ 12,473,168
16,934,846 First Plus Ser. 98-A, Class A, 8 1/2s, 2023 17,138,594
6,242,862 Green Tree Recreational Equipment & Cons
Ser. 97-B, Class A1, 6.55s, 2028 6,418,931
10,000,000 Morgan Stanley Aircraft Finance Ser. 1A, Class C1,
6.9s, 2023 10,706,250
19,960,735 Sasco 98 Rf2 A 8.58s, 2028 21,750,964
12,322,646 Sasco P/p 144a 8.712s, 2027 13,481,745
--------------
Total Asset-Backed Securities (cost $80,365,134) $ 81,969,652
UNITS (1.6%) (a)
NUMBER OF UNITS VALUE
- --------------------------------------------------------------------------------------------------------------------------
2,960 Australis Media, Ltd. units stepped-coupon zero %,
(15 3/4s, 5/15/03), 2003 (In Default) (Australia) (STP) (NON) $ 22,200
3,630 Bestel S.A.de CV units, stepped-coupon zero %
(12 3/4s,5/15/03), 2005 (STP) 2,032,800
3,630 Birch Telecom, Inc. 144A units 14s, 2008 3,194,400
877 Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 12/4/98), 2004 (Colombia) (STP) 17,540,000
15,328 Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2008 (STP) 5,211,520
15,550 Firstworld Communication 144A units stepped-coupon
zero % (13s,4/15/03), 2008 (STP) 4,665,000
6,100 ICO Global Communications Ltd. units 15s, 2005 4,758,000
9,530 Long Distance International, Inc. 144A units
12 1/4s, 2008 9,148,800
4,350 Mediq 144A units, 13s, 2009 2,175,000
2,090 Onepoint Communications, Inc. units 14 1/2s, 2008 1,525,700
6,600 Pegasus Shipping 144A units company guaranty
zero %, 2008 3,036,000
10,490 Rhythms Netcon 144A units stepped-coupon zero %
(13 1/2s, 5/15/03), 2008 (STP) 4,196,000
3,980 Signature Brands USA, Inc. units 13s, 2002 4,537,200
8,690 Startec Global Communications Corp. units 12s, 2008 7,516,850
2,980 Telehub Communications Corp. units stepped-coupon
zero %, (13 7/8s, 7/31/02), 2005 (STP) 1,579,400
5,260 Transam Refinance, Inc. 144A units 16s, 2003 3,524,200
3,945 XCL Ltd. units sr. sec. notes 13 1/2s, 2004 4,142,250
23,198 XCL Ltd. 144A units cv. cum. pfd. 9 1/2s, 2006 (PIK) 2,134,216
--------------
Total Units (cost $90,476,574) $ 80,939,536
CONVERTIBLE BONDS AND NOTES (0.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 5,045,000 APP Global Finance (V) Ltd. 144A cv. sec. 2s, 2000
(United Kingdom) $ 2,976,550
13,060,000 APP Global Finance Ltd. 144A cv. company guaranty
3 1/2s, 2003 (United Kingdom) 4,962,800
4,200,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 3,822,000
2,782,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-
coupon zero % (13 7/8s, 12/15/00), 2005 (STP) 3,616,600
2,310,000 Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 1,559,250
6,230,000 Jacor Communications, Inc. cv. sr. notes zero %, 2011 4,298,700
7,835,000 WinStar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 10,185,500
--------------
Total Convertible Bonds and Notes
(cost $36,506,394) $ 31,421,400
COMMON STOCKS (0.6%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
145,780 American Mobile Satellite Corp. (NON) $ 765,345
1,750 AmeriKing, Inc. (NON) 70,000
198,372 Celcaribe S.A. 144A (Colombia) 1,190,232
172,600 CellNet Data Systems, Inc. (NON) 1,035,600
120,810 Chattem, Inc. (NON) 3,299,623
252,474 Chesapeake Energy Corp. 299,813
45,000 Exide Corp. 517,500
3,026 Finlay Enterprises, Inc. (NON) 25,343
32,500 French Fragrances Inc. (NON) 235,625
40,032 Hedstrom Holdings, Inc. 144A 50,040
7,541 IFINT Diversified Holdings 144A (NON) 56,558
8,280 Lady Luck Gaming Corp. (NON) 43,469
844 Mothers Work, Inc. (NON) 9,073
235,748 NEXTEL Communications, Inc. Class A (NON) 4,759,163
900 Paging Do Brazil Holdings Co., LLC Class B, (Brazil) (NON) 9
1,942 Premium Holdings L.P. 144A (NON) 7,768
979,968 PSF Holdings LLC Class A (acquired various dates from
8/31/94 to 3/16/95, cost $34,291,491) (NON) (RES) (AFF) 17,169,039
31,004 RSL Communications, Ltd. Class A (NON) 840,984
--------------
Total Common Stocks (cost $49,558,106) $ 30,375,184
WARRANTS (0.3%) (a)(NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
9,355 Allegiance Telecom, Inc. 2/3/08 $ 149,680
5,955 American Mobile Satellite Corp. 4/1/08 28,048
185,000 Becker Gaming Corp. 144A 11/15/00 1,850
44,363 Capital Gaming International, Inc. 2/1/99 1,775
28,657 Cellnet Data Systems, Inc. 9/15/07 1,146,280
130,000 CGA Group Ltd. 144A 2/11/07 2,600
4,390 Club Regina, Inc. 144A 4/15/06 26,340
15,295 Colt Telecommunications Group PLC 12/31/06 4,588,500
12,400 Comunicacion Cellular 144A (Colombia) 11/15/03 818,400
1,345 Concentric Network Corp. 12/15/07 121,050
51,502 Consorcio Ecuatoriano 144A (Ecuador) 10/1/00 19,313
9,350 County Seat Holdings, Inc. 10/15/98 187
4,930 Covad Communications Group 144A 3/15/08 49,300
4,650 Diva Systems Corp. 5/15/06 1,302,000
111,775 DTI Holdings Inc. 3/1/08 111,775
70 E. Spire Communications, Inc. 11/1/05 4,900
10,155 Econophone, Inc. 144A 7/1/07 558,525
3,640 Epic Resorts 6/15/05 36
3,200 Esat Holdings, Inc. (Ireland) 2/1/07 112,000
6,850 Fitzgerald Gaming Co. 144A 3/15/99 685
5,350 Globalstar Telecom 144A 2/15/04 133,750
11,465 Hyperion Telecommunications 144A 4/15/01 484,282
65,538 Intelcom Group 144A 10/15/05 1,769,526
6,030 Interact Systems, Inc. 8/1/03 60
8,050 Intermedia Communications 6/1/00 835,510
2,780 International Wireless Communications
Holdings 144A 8/15/01 278
6,500 Iridium World Com 144A 7/15/05 780,000
9,460 KMC Telecom Holdings, Inc. 4/15/08 151,360
8,835 Knology Holdings, Inc. 144A 10/15/07 13,253
8,025 Louisiana Casino Cruises, Inc. 144A 12/1/98 425,325
14,715 McCaw International Ltd. 4/15/07 58,860
1,550 Metronet Communications 144A 8/15/07 43,400
1,390 MGC Communications, Inc. 144A 10/1/04 68,777
21,500 NEXTEL Communications Inc. 4/25/99 215
4,250 Orbital Imaging Corp. 144A 3/1/05 170,000
8,485 Orion Network Systems 1/15/07 97,578
13,800 Pagemart, Inc. 144A 12/31/03 110,400
6,810 Pathnet, Inc. 144A 4/15/08 102,150
7,360 Paxson Communications Corp. 144A 6/30/03 74
28,800 Powertel, Inc. 2/1/06 201,600
37,527 President Riverboat Casinos, Inc. 9/30/99 3,753
3,450 Spanish Broadcasting Systems 144A 6/30/99 707,250
2,160 Sterling Chemicals Holdings 8/15/08 45,360
14,235 UIH Australia/Pacific, Inc. 144A 5/15/06 71,175
3,820 Versatel 144A 5/15/08 38,200
6,375 Wireless One, Inc. 10/19/00 64
1,001 Wright Medical Technology, Inc. 144A 6/30/03 65,038
--------------
Total Warrants (cost $8,550,830) $ 15,420,482
CONVERTIBLE PREFERRED STOCKS (0.1%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
29,800 Chancellor Media Corp. $3.00 cv. cum. pfd. $ 2,149,325
25,210 Chesapeake Energy Corp. 144A $3.50 cv. cum. pfd. 378,150
230 Paxson Communications Corp. 144A cv. pfd. (PIK) 2,300,000
2,126 XCL Ltd 144A Ser. A, 9.50% cv. cum. pfd. 195,592
--------------
Total Convertible Preferred Stocks
(cost $7,117,598) $ 5,023,067
SHORT-TERM INVESTMENTS (5.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$50,000,000 Asset Securitization Cooperative Corp. effective yield
of 5.6%, October 2, 1998 $ 49,992,222
15,000,000 Corporate Receivables Corp. effective yield of 5.42%,
October 6, 1998 14,988,708
25,000,000 Corporate Receivables Corp. effective yield of 5.4%,
October 26, 1998 24,906,250
29,610,000 Falcon Asset Securitization Corp. effective yield of 5.53%,
October 19, 1998 29,527,832
32,250,000 Federal Home Loan Mortgage Corp. effective yield of 5.36%,
November 6, 1998 32,082,945
25,000,000 Morgan (J.P.) & Co. Inc. effective yield of 5 1/2%,
October 16, 1998 24,942,708
50,000,000 Sheffield Receivables Corp. effective yield of 5.59%,
October 15, 1998 49,891,306
62,614,000 Interest in $750,000,000 joint repurchase agreement
dated September 30,1998 with Goldman Sachs & Co.
due October 1, 1998 with respect to various U.S. Treasury
obligations-maturity value of $62,623,479 for an
effective yield of 5.45% 62,623,479
--------------
Total Short-Term Investments (cost $288,955,450) $ 288,955,450
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $5,393,288,300) (b) $5,188,320,046
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $5,124,629,185.
(b) The aggregate identified cost on a tax basis is $5,397,447,964, resulting in gross unrealized appreciation and
depreciation of $211,339,597 and $420,467,515, respectively, or net unrealized depreciation of $209,127,918.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the
fund will begin receiving interest at this rate.
(POR) A portion of the income will be received in additional securities.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at September 30,1998 was $17,169,039 or 0.3% of net assets.
(PIK) Income may be received in cash or additional securities at the discretion of the issuer.
(AFF) Affiliated Companies (Note 5).
(SEG) A portion of these securities were pledged and segregated with the custodian to cover margin requirements for
futures contracts at September 30, 1998.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified
institutional buyers.
TBA after the name of a security represents to be announced securities (Note 1).
FLIRB represents Front Loaded Interest Reduction Bond.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at September 30,1998, which are subject to change based on the terms of the security.
(R)Real Estate Investment Trust.
Diversification by Country
Distribution of investments by country of issue at September 30,1998 (as percentage of Market Value)
Brazil 1.2%
Canada 1.1
France 3.8
Germany 3.3
Mexico 2.5
United Kingdom 4.0
United States 79.3
Others 4.8
-----
Total 100.0%
=====
- -------------------------------------------------------------------------------
Forward Currency Contracts to Buy at September 30, 1998
(aggregate face value $607,576,889)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Australian Dollars $ 1,754,987 $ 1,720,758 12/16/98 $ 34,229
Danish Krone 26,907,165 25,633,023 12/16/98 1,274,142
Deutschemarks 229,770,108 221,746,811 12/16/98 8,023,297
Italian Lira 81,946,068 78,906,116 12/16/98 3,039,952
Japanese Yen 165,473,449 168,772,131 12/16/98 (3,298,682)
Spanish Peseta 46,179,109 44,137,456 12/16/98 2,041,653
Swedish Krona 67,117,830 66,660,594 12/16/98 457,236
- -------------------------------------------------------------------------------
$11,571,827
- -------------------------------------------------------------------------------
Forward Currency Contracts to Sell at September 30, 1998
(aggregate face value $892,267,748)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
British Pounds $144,973,289 $143,442,617 12/16/98 $ (1,530,672)
Deutschemarks 385,349,758 371,658,788 12/16/98 (13,690,970)
Dutch Guilder 28,440,010 27,509,190 12/16/98 (930,820)
French Franc 188,862,366 180,575,550 12/16/98 (8,286,816)
Japanese Yen 165,994,709 169,081,603 12/16/98 3,086,894
- -------------------------------------------------------------------------------
$(21,352,384)
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 1998
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- -------------------------------------------------------------------------------
U.S. Treasury Bond
20 yr. (Long) $335,376,781 $322,415,853 Dec.-98 $12,960,928
- -------------------------------------------------------------------------------
TBA Sales Commitments at September 30, 1998
(proceeds receivable $107,632,044)
Principal Settlement Market
Agency Amount Date Value
- -------------------------------------------------------------------------------
FNMA 6.5s, October 2028 $107,030,000 10/14/98 $108,835,596
GNMA 8s, October 2028 3,400,000 10/21/98 3,542,358
- -------------------------------------------------------------------------------
$112,377,954
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $5,393,288,300) (Note 1) $5,188,320,046
- -----------------------------------------------------------------------------------------------
Cash 15,484,091
- -----------------------------------------------------------------------------------------------
Foreign currency (cost $1,510,366) 1,583,954
- -----------------------------------------------------------------------------------------------
Dividends, interest and other receivables 85,217,898
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 25,228,029
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 138,702,696
- -----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 11,571,827
- -----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 532,177
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 2,921,828
- -----------------------------------------------------------------------------------------------
Total assets 5,469,562,546
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 186,649,467
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 11,571,085
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 7,213,906
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 432,738
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 56,183
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 8,685
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 4,415,247
- -----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 329,019
- -----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 21,352,384
- -----------------------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable $107,632,044) 112,377,954
- -----------------------------------------------------------------------------------------------
Other accrued expenses 526,693
- -----------------------------------------------------------------------------------------------
Total liabilities 344,933,361
- -----------------------------------------------------------------------------------------------
Net assets $5,124,629,185
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $5,435,631,893
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (18,502,646)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (86,151,365)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (206,348,697)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $5,124,629,185
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,911,024,526 divided by 163,871,941 shares) $11.66
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $11.66)* $12.24
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($2,174,769,548 divided by 187,293,005 shares)** $11.61
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,019,477,311 divided by 87,699,097 shares) $11.62
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $11.62)* $12.01
- -----------------------------------------------------------------------------------------------
Net asset value, offering and redemption price per class Y share
($19,357,800 divided by 1,659,655 shares) $11.66
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1998
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Interest $ 453,511,653
- -----------------------------------------------------------------------------------------------
Dividends 19,361,052
- -----------------------------------------------------------------------------------------------
Total investment income 472,872,705
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 28,525,765
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 8,217,900
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 91,185
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 34,794
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 5,169,035
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 23,327,027
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 4,669,378
- -----------------------------------------------------------------------------------------------
Reports to shareholders 249,900
- -----------------------------------------------------------------------------------------------
Registration fees 112,583
- -----------------------------------------------------------------------------------------------
Auditing 164,921
- -----------------------------------------------------------------------------------------------
Legal 210,115
- -----------------------------------------------------------------------------------------------
Postage 510,254
- -----------------------------------------------------------------------------------------------
Other 389,280
- -----------------------------------------------------------------------------------------------
Total expenses 71,672,137
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (1,714,087)
- -----------------------------------------------------------------------------------------------
Net expenses 69,958,050
- -----------------------------------------------------------------------------------------------
Net investment income 402,914,655
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1, 3 and 5) (including realized
loss of $24,431,167 on sales of investments in affiliated issuers) (87,707,221)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 24,382,804
- -----------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 1,015,376
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (91,585,547)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities in
foreign currencies during the year 4,598,488
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, futures,
written options, and TBA sale commitments during the year (364,633,761)
- -----------------------------------------------------------------------------------------------
Net loss on investments (513,929,861)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(111,015,206)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 402,914,655 $ 297,161,877
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions (153,894,588) 29,558,499
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies (360,035,273) 117,233,998
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (111,015,206) 443,954,374
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (114,992,046) (138,128,131)
- ---------------------------------------------------------------------------------------------------------------
Class B (113,025,405) (141,702,029)
- ---------------------------------------------------------------------------------------------------------------
Class M (53,202,027) (9,536,880)
- ---------------------------------------------------------------------------------------------------------------
Class Y (1,263,192) (768,670)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain
Class A (26,647,112) --
- ---------------------------------------------------------------------------------------------------------------
Class B (29,842,995) --
- ---------------------------------------------------------------------------------------------------------------
Class M (8,746,851) --
- ---------------------------------------------------------------------------------------------------------------
Class Y (238,299) --
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 579,106,761 820,638,498
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 120,133,628 974,457,162
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 5,004,495,557 4,030,038,395
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $18,502,646 and
$50,209,102, respectively) $5,124,629,185 $5,004,495,557
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.70 $12.29 $11.99 $11.64 $12.82
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .99(c) .89(c) .89 .95 .78
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.17) .39 .30 .36 (.88)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.18) 1.28 1.19 1.31 (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.70) (.87) (.89) (.80) (.71)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.16) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.16) (.17)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.86) (.87) (.89) (.96) (1.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.66 $12.70 $12.29 $11.99 $11.64
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (1.67) 10.86 10.35 11.89 (.93)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,911,024 $2,104,971 $1,845,901 $1,597,034 $1,539,076
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .97 .99 1.02 1.01 1.01
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.88 7.17 7.32 8.22 7.96
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 188.75 250.93 304.39 235.88 201.53
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended September 30, 1995 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.65 $12.24 $11.95 $11.61 $12.79
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .89(c) .79(c) .80 .88 .72
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.17) .40 .29 .33 (.91)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.28) 1.19 1.09 1.21 (.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.60) (.78) (.80) (.72) (.65)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.16) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.15) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.76) (.78) (.80) (.87) (.99)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.61 $12.65 $12.24 $11.95 $11.61
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (2.42) 10.08 9.47 11.01 (1.62)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,174,770 $2,366,410 $2,135,148 $1,795,456 $1,644,860
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.72 1.74 1.77 1.76 1.76
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.13 6.42 6.57 7.46 8.05
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 188.75 250.93 304.39 235.88 201.53
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended September 30, 1995 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Dec. 1, 1994+
operating performance Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $12.67 $12.27 $11.97 $11.34
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .96(c) .82(c) .86 .78
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.18) .43 .31 .63
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.22) 1.25 1.17 1.41
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.67) (.85) (.87) (.65)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.16) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.83) (.85) (.87) (.78)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.62 $12.67 $12.27 $11.97
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (1.97) 10.59 10.12 12.90 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,019,477 $513,351 $46,327 $14,751
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.22 1.24 1.28 1.07 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.69 6.88 7.09 6.30 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 188.75 250.93 304.39 235.88
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended September 30, 1995 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS Y
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended July 1, 1996+
operating performance September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $12.70 $12.29 $12.07
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 1.03(c) .93(c) .24
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.18) .38 .20
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.15) 1.31 .44
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.73) (.90) (.22)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.16) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.89) (.90) (.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $11.66 $12.70 $12.29
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (1.40) 11.14 3.70*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $19,358 $19,763 $2,662
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .72 .74 .19*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 8.15 7.29 1.95*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 188.75 250.93 304.39
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended September 30, 1995 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
</TABLE>
Notes to financial statements
September 30, 1998
Note 1
Significant accounting policies
Putnam Diversified Income Trust (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks high current income
consistent with preservation of capital by allocating its investments
among the U.S. government sector, high yield sector and international
sector of the fixed-income securities market.
The fund offers class A, class B, class M and class Y shares. Class A
shares are sold with a maximum front-end sales charge of 4.75%. Class B
shares, which convert to class A shares after approximately eight years,
do not pay a front-end sales charge but pay a higher ongoing distribution
fee than class A shares, and are subject to a contingent deferred sales
charge, if those shares are redeemed within six years of purchase. Class M
shares are sold with a maximum front end sales charge of 3.25% and pay an
ongoing distribution fee that is higher than class A shares but lower than
class B shares. Class Y shares, which are sold at net asset value, are
generally subject to the same expenses as class A, class B, and class M
shares, but do not bear a distribution fee. Class Y shares are sold to
defined contribution plans that invest at least $250 million in a
combination of Putnam Funds and other accounts managed by affiliates of
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if that fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of
some securities traded over-the-counter -- the last reported bid price.
Securities quoted in foreign currencies are translated into U.S. dollars
at the current exchange rate. Market quotations are not considered to be
readily available for long term corporate bonds and notes; such
investments are stated at fair market value on the basis of valuations
furnished by a pricing service, approved by the Trustees, or dealers,
which determine valuations for normal, institutional-size trading units of
such securities using methods based on market translations for comparable
securities and variable relationships between securities that are
generally recognized by institutional traders. Short-term investments
having remaining maturities of 60 days or less are stated at amortized
cost, which approximates market value, and other investments including
restricted securities are stated at fair market value following procedures
approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Management. These balances may be invested in one or more
repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recorded as soon as the fund is
informed of the ex-dividend date. Discounts on zero coupon bonds, original
issue discount bonds, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield-to-maturity basis. Securities purchased or
sold on a when-issued or delayed delivery basis may be settled a month or
more after the trade date; interest income is accrued based on the terms
of the security. Losses may arise due to changes in the market value of
the underlying securities or if the counterparty does not perform under
the contract.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, and other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The fund
does not isolate that portion of realized or unrealized gains or losses
resulting from changes in the foreign exchange rate on investments from
fluctuations arising from changes in the market prices of the securities.
Such gains and losses are included with the net realized and unrealized
gain or loss on investments. Net realized gains and losses on foreign
currency transactions represent net realized exchange gains or losses on
closed forward currency contracts, disposition of foreign currencies and
the difference between the amount of investment income and foreign
withholding taxes recorded on the fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized appreciation
and depreciation of assets and liabilities in foreign currencies arise
from changes in the value of open forward currency contracts and assets
and liabilities other than investments at the period end, resulting from
changes in the exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term investments).
The U.S. dollar value of forward currency contracts is determined using
current forward currency exchange rates supplied by a quotation service.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is "marked to market" daily and the change in
market value is recorded as an unrealized gain or loss. When the contract
is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. The fund could be exposed to risk if
the value of the currency changes unfavorably, if the counterparties to
the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the unit
price has been established, the principal value has not been finalized.
However, the amount of the commitments will not fluctuate more than 1.0%
from the principal amount. The fund holds, and maintains until settlement
date, cash or high-grade debt obligations in an amount sufficient to meet
the purchase price, or the fund may enter into offsetting contracts for
the forward sale of other securities it owns. Income on the securities
will not be earned until settlement date. TBA purchase commitments may be
considered securities in themselves, and involve a risk of loss if the
value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in the value of the
fund's other assets. Unsettled TBA purchase commitments are valued at the
current market value of the underlying securities, according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with
the intention of acquiring securities for their portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of
a commitment prior to settlement if Putnam Management deems it appropriate
to do so.
I) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale commitments
are not received until the contractual settlement date. During the time a
TBA sale commitment is outstanding, equivalent deliverable securities, or
an offsetting TBA purchase commitment deliverable on or before the sale
commitment date, are held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Security valuation" above. The contract is "marked-to-market" daily
and the change in market value is recorded by the fund as an unrealized
gain or loss. If the TBA sale commitment is closed through the acquisition
of an offsetting purchase commitment, the fund realizes a gain or loss. If
the fund delivers securities under the commitment, the fund realizes a
gain or a loss from the sale of the securities based upon the unit price
established at the date the commitment was entered into.
J) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
September 30, 1998, the fund had no borrowings against the line of credit.
K) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies. It is also the intention of the fund to distribute an amount
sufficient to avoid imposition of any excise tax under Section 4982 of the
Internal Revenue Code of 1986, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains. At September 30, 1998, the fund had a capital loss carryover of
approximately $22,379,000 available to offset future net capital gain, if
any, which will expire on September 30, 2006.
L) Distributions to shareholders Distributions to shareholders are
recorded by the fund on the ex-dividend date. At certain times, the fund
may pay distributions at a level rate even though, as a result of market
conditions or investment decisions, the fund may not achieve projected
investment results for a given period. The amount and character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These differences include temporary and permanent differences
of losses on wash sale transactions, foreign currency gains and losses,
post-October loss deferrals, defaulted bond interest, paydown gains and
losses on mortgage-backed securities, market discount, and interest on
payment-in-kind securities. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations. For
the year ended September 30, 1998, the fund reclassified $88,725,529 to
decrease undistributed net investment income and $2,899,151 to increase
paid-in-capital, with a decrease to accumulated net realized loss on
investments of $85,826,378. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.70% of the first $500
million of net assets, 0.60% of the next $500 million, 0.55% of the next
$500 million, 0.50% the next $5 billion, 0.475% of the next $5 billion,
0.455% of the next $5 billion, 0.44% of the next $5 billion and 0.43%
thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended September 30, 1998, fund expenses were reduced by
$1,714,087 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $3,550
has been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares
respectively. The Trustees have approved payment by the fund to an annual
rate of 0.25%, 1.00% and 0.50% of the average net assets attributable to
class A, class B and class M shares, respectively.
For the year ended September 30, 1998, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $688,746 and $2,577,007 from
the sale of class A and class M shares, respectively and $4,361,652 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares. For the year ended September 30, 1998, Putnam Mutual Funds
Corp., acting as underwriter received $64,104 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended September 30, 1998, purchases and sales of
investment securities other than U.S. government obligations and
short-term investments aggregated $6,762,098,609 and $5,649,902,318,
respectively. Purchases and sales of U.S. government obligations
aggregated $3,182,609,994 and $4,008,566,780, respectively. In determining
the net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Written option transactions during the period are summarized as follows:
Contract Premiums
Amounts Received
- -----------------------------------------------------------------------------
Written options
outstanding at
beginning of
period 42,695,000 $ 531,553
- -----------------------------------------------------------------------------
Options opened 88,900,000 483,823
- -----------------------------------------------------------------------------
Options expired -- --
- -----------------------------------------------------------------------------
Options closed (131,595,000) (1,015,376)
- -----------------------------------------------------------------------------
Written options
outstanding at
end of period -- $ --
- -----------------------------------------------------------------------------
Note 4
Capital shares
At September 30, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 36,293,097 $ 453,137,516
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,882,014 98,183,326
- -----------------------------------------------------------------------------
44,175,111 551,320,842
Shares
repurchased (46,064,113) (574,132,635)
- -----------------------------------------------------------------------------
Net decrease (1,889,002) $ (22,811,793)
- -----------------------------------------------------------------------------
Year ended
September 30, 1997
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 50,428,499 $ 623,873,227
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,448,328 91,808,396
- -----------------------------------------------------------------------------
57,876,827 715,681,623
Shares
repurchased (42,338,783) (523,016,705)
- -----------------------------------------------------------------------------
Net increase 15,538,044 $192,664,918
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 37,418,693 $ 466,071,389
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,604,144 94,361,790
- -----------------------------------------------------------------------------
45,022,837 560,433,179
Shares
repurchased (44,854,315) (557,097,611)
- -----------------------------------------------------------------------------
Net increase 168,522 $ 3,335,568
- -----------------------------------------------------------------------------
Year ended
September 30, 1997
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 48,992,431 $603,519,098
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,385,800 90,713,708
- -----------------------------------------------------------------------------
56,378,231 694,232,806
Shares
repurchased (43,686,864) (538,188,308)
- -----------------------------------------------------------------------------
Net increase 12,691,367 $156,044,498
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 82,461,493 $1,026,199,238
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 349,509 4,341,133
- -----------------------------------------------------------------------------
82,811,002 1,030,540,371
Shares
repurchased (35,639,555) (433,252,902)
- -----------------------------------------------------------------------------
Net increase 47,171,447 $ 597,287,469
- -----------------------------------------------------------------------------
Year ended
September 30, 1997
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 38,634,020 $478,951,730
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 272,797 3,355,307
- -----------------------------------------------------------------------------
38,906,817 482,307,037
Shares
repurchased (2,156,006) (26,629,199)
- -----------------------------------------------------------------------------
Net increase 36,750,811 $455,677,838
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 828,036 $ 10,404,282
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 120,519 1,501,491
- -----------------------------------------------------------------------------
948,555 11,905,773
Shares
repurchased (845,466) (10,610,256)
- -----------------------------------------------------------------------------
Net increase 103,089 $ 1,295,517
- -----------------------------------------------------------------------------
Year ended
September 30, 1997
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,357,348 $16,476,493
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 62,495 768,670
- -----------------------------------------------------------------------------
1,419,843 17,245,163
Shares
repurchased (80,288) (993,919)
- -----------------------------------------------------------------------------
Net increase 1,339,555 $16,251,244
- -----------------------------------------------------------------------------
Note 5
Transactions with Affiliated Companies
Transactions during the year with companies in which the fund owns at
least 5% of the voting securities were as follows:
Purchase Sales Dividend Market
Affiliates cost cost Income Value
- ------------------------------------------------------------------------
Name of affiliates
- ------------------------------------------------------------------------
PSF Holdings L.L.C. CL A $-- $ -- $-- $17,169,039
- ------------------------------------------------------------------------
Grand Union -- 24,485,117 -- --
- ------------------------------------------------------------------------
Total $-- $24,485,117 $-- $17,169,039
- ------------------------------------------------------------------------
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
The fund has designated 0.43% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Quality Bond Fund +
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds -- three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
**An investment in a money market fund is neither insured nor guaranteed
by the U.S. government. These funds are managed to maintain a price of
$1.00 per share, although there is no assurance that this price will be
maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Steven M. Oristaglio
Vice President
Jennifer E. Leichter
Vice President and Fund Manager
Michael Martino
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Diversified
Income Trust. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' website:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
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AN028 47020 075/387/803/2BC 11/98
